Rates have ticked up about .375% on average in the last week or so, with much reaction from within the mortgage & real estate industries, as well as prospective buyers. What is the real effect and how do we move forward? Let’s explore the real ramifications, look forward realistically and cut through the “doom & gloom” – first, watch this newscast & reactions to the rate increase and I will give my thoughts below.
The Sky Is Falling!
It’s hard not to have this outlook at first since this rate increase does represent a spike in a fairly short amount of time, with most rates increasing about .375% over the last week. Most Conventional loans went from 3.625% and have been fluctuating between 3.875% and 4.00% (0 points). For an average purchase in the central Maryland area of $250,000 with a 5% down payment, that represents about a $48/month increase in the mortgage payment – and while that is $48/month that could be used in other areas of a budget, I do believe that we need to take a step back and really consider whether a $48 payment should be a deal breaker when buying a house worth a quarter of a million dollars.
Purchasing Power, or the maximum amount that a borrower can be qualified for, IS reduced with rate increases. However, this assumes that most buyers are purchasing a house right up to the maximum amount of their qualifications – a precarious place to be, where rates among other factors (such as an unexpected decrease in pay) can also reduce purchasing power. For buyers that have taken into account their own budget and are not buying the maximum house they can buy, these rates should have little to no impact.
I conduct homebuying seminars regularly and communicate with buyers that interest rates are a perk, but should not be the sole driving force of buying a house in today’s market. Primary Residence Home buying should be driven by the desire to buy a home in an area you’re comfortable living in, that fits your lifestyle and needs.
In other words it should not be driven by fear that you won’t be able to afford a home, or that interest rates may be different in the future (think back circa 2003 – 2007). Young, First-Time Homebuyers make up a significant portion of our homebuying market. A 4.00% interest rate should not be viewed as a deterrent from buying a home.
Refinance “Fence Sitters”
The increase in rates affects anyone who had seen our recent lows but were on the fence thinking that refinance rates might go “just a little lower”. This is a prime example of how quickly rates can change, and borrowers must weight risk vs reward when trying to predict interest rates. I am of the mind that if a refinance makes sense at 4%, it does not make sense to delay the savings for the possibility that rates may dip to 3.75% (and save an extra $20/month). Even in the short-term history (last 3 years) we are still sitting at extremely historically low rates even with these rate increases – don’t lose out on the opportunity due to the disappointment of not hitting the absolute floor of rates (which is difficult, if not impossible to do intentionally).
The Federal Reserve and Ben Bernanke have stated on numerous occassions that they would like to keep interest rates low through 2015, however they have also described a “tapering off” of the Fed’s role in buying Mortgage Backed Securities (MBS), which by most accounts leads experts to believe that rates will gradually go up in the years to come. This has been part of the plan all along so we should not be surprised or taken off guard by rate spikes. In the next coming weeks, I expect high market voltality, and there will certainly be better and worse days than others as market analysts decipher Federal Reserve announcements and their intentions going forward.
The sky is not falling, but we must step back and realize that mortgage rates cannot stay at these lows forever. As a mortgage professional I wish they would, but realistically I know they cannot. Let’s prepare ourselves moving forward and keep a “big picture” perspective on how low mortgage rates are currently.