ARMS to Rise
Adjustable rate mortgages, known as ARMS, are tied to a number of indices such as the Libor, which has already moved higher in 2016.
Borrowers with an ARM have already seen a modest increase in their monthly payments. A homeowner with a 5/1 or 7/1 ARM will have their rates reset every five or seven years, but after that initial reset, the hikes occur annually.
The current low interest rate environment provides a good opportunity for a homeowner to refinance their ARMs into a fixed rate mortgage since additional increases are likely, depending on how "active the Fed is," he said.
"There is no better time than the present since next year's increase could be more significant," McBride said. "Some homeowners are maybe even looking at an even swap. If you can swap from a 3.5% ARM to a 3.5% fixed rate and insulate yourself from future increases, that's a trade that is worth making."
Timing of Increases
If the economic data improve, then July and December are the most likely meetings for a hike since the Yellen Fed is "very data driven," Johnson said.
"I believe November is off the table as it is a week before the U.S. presidential election," he said. "I doubt any action would be taken in September in the run up to the election. It is very clear that the Fed wants to raise rates, but they have been very cautious not to do so prematurely."
The Fed considers a three-prong test for increasing interest rates: examining indicators of a rebound in the economy, additional strengthening in employment and inflation occurring near 2%, he said.
The current indicators are inconclusive since economic growth has been moderate since the GDP in the first quarter was only 0.8% and GDP in the second quarter is expected to be 2.5%.
"The job market looks fairly strong, but while consumer prices rose at the fastest rate in April in two years, by Yellen's own admission, inflation will take some time to reach the Fed's 2% target rate," Johnson said.
The Fed lacks compelling economic reasons to raise interest rates currently, said David Twibell, president of Englewood, Colo.-based Custom Portfolio Group.
"The economy continues to plod along at the same anemic pace that has characterized the entire recovery," he said. "The real reason to raise rates is to counteract the massive imbalances created over the past eight years of 0% rates."
The global economy has not improved and now conditions in the U.S. are softening, said Smoke.
"The very low level of rates is causing credit conditions to be tighter than they would be if rates were higher," he said. "When economic conditions warrant it, we would be better off in aggregate if we had slightly higher rates."