Recent Increasing Mortgage Rates May Be Less Troublesome Than a Lot of People Might Actually Believe


Are Soaring Mortgage Rates Really Soaring?

There is no doubt about it. Rising mortgage rates have been a fact for the past few months, and the increases have some potential homebuyers worrying about affordability. But, there is no need to panic. Increasing Mortgage Rates are not as high as Most People Might Actually Believe. NSH Mortgage has the knowledge and tools to help you understand for 2017.


Rising Mortgage Rates Increase Monthly Payments

Let’s start with the basics. First, given a choice between low rates and higher rates, you always want the cheaper variety. Second, the accounts you have discovered are right: rates have risen. According to Freddie Mac, the cost of fixed-rate 30-year prime mortgages were 4.30 percent just before Christmas versus 3.44 percent on September 8th. That is a difference of .86 percent.

If we borrow $200,000 at 4.3 percent, the monthly principal and interest are $989.74. The same loan at 3.44 percent costs $891.40 per month, a difference of $98.34. Okay, so what could possibly be good about this picture?


Rising Rates Do not Necessarily Mean Higher Costs

Let’s say that in September 2016, a couple could only afford a $891.40 principal and interest payments. They could buy a home worth $250,000 with 20 percent down $50,000 and a $200,000 loan. If rates ascend to 4.3 percent, and the buyers can still only afford $891.40 a month, their borrowing power has gone down. If they still put $50,000 down, they could buy a $230,128 house with no payment increase.

The big contemplation is whether with higher interest rates, home appreciation will slow or even fall. If the answer is yes, rising rates may simply imply fewer competing bids and lower home values, in other words, the home that formerly purchased at $250,000 may only sell for $230,128. If this sounds unlikely, consider what the National Association of Realtors (NAR) stated for the third quarter in 2016, that existing home prices fell in 22 metros. And the third quarter ended in September, months before mortgage rates really took off.

For 2017, the (NAR) is speculating minimal gains. The organization’s Chief Economist, Lawrence Yun, told HousingWire that existing home sales are expected to see little expansion next year because of affordability tensions from climbing mortgage rates and prices persisting to overwhelm income growth.


Rising Mortgage Rates and Refinancing

For those who wish to refinance, the goal is to find a replacement mortgage with better terms, or to swap from an adjustable-rate mortgage to financing with a fixed rate. The marketplace reality is that refinancing levels are plausibly to decline as mortgage rates rise, especially today when plenty have already secured mortgages with very low interest rates.

That said, there will still be some refinancing, because even with today’s higher rates, large numbers of borrowers can still get a financial advantage. Analysts at CoreLogic report that 23 percent of all existing mortgages in September had a rate of at least five percent. Many borrowers with such loans can benefit from new financing at some point.


Rising Mortgage Rates And The ARM Exchange

Most borrowers simply do not opt for adjustable-rate mortgages. According to Ellie Mae, just 3.9 percent of the mortgages closed in November were ARMs.

One central issue with ARMs is that borrowers worry that rates will rise in the future. It is a realistic concern, but consider this: you can get hybrid ARMs. These loans have fixed rates for three, five, seven or ten years before they adjust.

Taking a fixed rate loan when you do not need one can be costly. For instance, when 30-year fixed-rate prime loans were at 4.30 percent in December, 5/1 ARMs were at 3.32 percent. That is nearly a full percent lower.

If you still own your home when the introductory fixed period ends, you will have paid down part of your balance. Your new payment will be based on the remaining loan balance, and interest rate increases are limited by the terms of your loan. These limits are called caps. Freddie Mac said in the third quarter of 2016, the typical loan was repaid in just 4.5 years. Many borrowers will never worry about higher rates, because 5/1 ARMs do not begin adjusting for five years.


Rising Mortgage Rates And Perspective

Back in 1981, the average rate for a prime mortgage was 16.62 percent. Seriously. And that is for well-funded borrowers who could put down 20 percent and avoid mortgage insurance. It might follow that with such absurd mortgage rates  the housing market would collapse. But that is not what happened. In 1981, the country had 2.4 million existing home sales and roughly 95 million fewer people than we have today.

Meanwhile, in 2017, we are looking at interest rates which are a fraction of what we saw in 1981. The era of ultra-low interest rates are over, said Lawrence Yun, when the Fed raised bank rates in December. Today’s short-term rate hike will be followed by several additional rounds of increases in 2017 and 2018. Despite these moves, mortgage rates will not rise alarmingly. By this time next year, expect the 30-year fixed rate to likely be in the 4.5 percent to five percent range.


And Rates Might Drop Again Anyway

If it is any comfort, it is possible that mortgage rates will follow the pattern we saw in 2016. Remember that several Fed increases were predicted for 2016 and higher mortgage levels were widely expected.

Instead, there was just one Fed increase, and mortgage rates fell steadily for the first half of the year, going from 3.97 percent for prime financing at the start of January to 3.41 percent in early July. So, when someone tells you mortgage rates will surely rise in 2017, forget predictions and economic forecasts and instead watch your local market. Keep your eyes on home prices and mortgage rates.

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