Ignore the headlines: Mortgage rates are great
Mortgage rates — keep things in perspective
Mortgage rates are rising! The sky is falling! Some recent scary headlines make it sound like the mortgage rate honeymoon is over and done.
Let’s keep things in perspective—rates are still excellent and should remain that way for many months.
It’s true that home loan rates have seen their steepest rise in years, from as low as 3.5% to 4.5% or so for a 30-year fixed-rate loan. And yet, The Wall Street Journal has opined that, even at 5%, housing is affordable by historical standards. Consumers in the early 1980s paid as much as 18% to buy a house—unimaginable today.
Mortgage rates likely will be somewhat unstable, by more recent measures, but should remain very attractive for the next half year at least.
Who pays attention?
Three kinds of consumers are paying close attention to rate activity: home sellers, home buyers, and those who might want to refinance an existing mortgage. There’s good news for all of them despite the rate bumps.
1. Sellers fear buyers will vamoose
If your house is on the market or soon will be, you might expect that rising mortgage rates will shrink the pool of available buyers. Yes, some buyers might get cold feet, or fail to qualify for a loan now—while others could decide to jump in lest rates go even higher.
If you’ve already made the decision to sell, and the property is in shape to show, don’t hesitate. You could be the beneficiary as other potential sellers stay on the sidelines waiting for rates to settle.
And while borrowing rates have risen, so have home prices generally—significantly in some markets. That’s also good news for sellers. Zillow Inc., the property research firm based in Seattle, reports that U.S. housing prices rose 2.4% this spring, the largest gain since 2004.
2. Buyers fear they can’t afford to get in
Say you’ve been hemming and hawing about whether or not to buy. Maybe there’s good reason for that: If cash flow is so tight that the rate rise means a monthly payment is no longer comfortable, you really aren’t ready.
Your credit union’s home loan specialist can help sort out these complicated market factors. Consider how much the rate affects affordability: A $200,000 home loan for 30 years at 3.5% would run about $900 a month. With the rate at 4.5%, the monthly payment hits $1,015. There is some loss in buying power.
And yet, you could take a bigger affordability hit from sharply rising house prices than from the rate increase. If more people compete to buy houses, home prices will rise even faster.
Bill Hampel, the chief economist for the Credit Union National Association (CUNA), points out that 30-year fixed-rate mortgages can be a very good thing for first-time home buyers “because they are freezing in their housing costs for several years.” And you protect your cash flow—a 30-year loan keeps monthly payments lower than if you elected a shorter mortgage term.
Another consideration if you still have the buying itch: Adjustable rates remain at rock bottom, about 3%. Mike Schenk, vice president of economics and statistics for CUNA, explains that “ARM rates typically are indexed to rates on shorter-term securities and most of the recent spike in rates occurred in longer-term securities.” If you know you won’t be in the new house for the long haul, talk to a credit union lender about borrowing at an adjustable rather than a fixed rate.
Keep in mind, too, that rents are also going up, so your cash flow could suffer if you stay in a rental rather than buy anyway.
If you have the down payment, the credit score, and are otherwise prepared to be a homeowner, the rate increase need not sideline your plans.
3. Refinancers fear it’s too late to benefit
Refinancing applications have dropped off considerably since rates began to bump up. And that makes sense, since people seeking to refinance often are chasing that elusive lowest rate.
On the other hand, you could be among the homeowners who sat out the refi frenzy because they did not have enough equity to qualify. The good news is that recent improvements in home values have lifted equity too—it’s possible that you’re in a better position to qualify for a refi now. If your rate is sitting at 5.5% or more, revisit the idea of refinancing.
Improvements in home values have lifted equity—it’s possible you’re in a better position to refinance now. And if you’re in an ARM poised for an increase, it can make sense to refinance if you plan to stay in the house several more years. Another possibility is to take a shorter term now, if you can afford the larger monthly payment, since shorter-term mortgage rates are still low.
You’re not alone — contact us
No matter which of the three camps you’re in, make the decision that is smart for you, today, and not based on headline writers’ alarming claims. Keep in mind, too, that these increases are signs that the economy is getting better, and that’s good news for all of us.
You do not have to sort out these complicated market factors on your own. Your credit union’s home loan officer can help you consider the variables and calculate the impact of different loan options.Go to main navigation