It’s finally happened, rates have gone up this past week. The good news is interest rates are still low by historical standards. You should still be shopping for a mortgage rate and term that fit your needs now, while also keeping in mind that interest rates will most likely be higher come renewal time. On that note, here are the answers to a few of the most frequently asked questions we receive after a rate hike.
Are these rate increases permanent or will they go down again?
Our favorite question, it’s like asking the weather person if it’s going to rain again. The quick answer is who knows for sure? We just don’t know exactly when or if it’s going to happen until it’s happened. To be honest, anytime we talk about the direction interest rates are going, it’s more of an educated guess than a guarantee. Economists are starting to forecast an economic rebound in the U.S beginning later this year and into 2014. Unemployment rates continue to drop, housing prices are starting to rebound and given what we have all learned regarding the “wealth affect” we know when consumers feel richer they start spending. The bond market is a good gauge for the establishment of mortgage pricing as most financial institutions will use the spread between bond yields as a means of establishing this pricing. Bond yields are set by the forces of competition between supply and demand and one relationship to note is that as prices go up, yields go down (and vice versa). And while we know there is a very strong connection between bond yields and mortgage rates, what has become increasingly unclear is the spread financial institutions are expecting to make these days. So while we can usually determine the direction of rate movement, the magnitude of these movements are somewhat more difficult to predict. This means that either there are going to be further rate increases or lenders are prepared to earn smaller spreads during our spring market. That’s the million dollar question and only time will tell.
Should I convert my variable rate mortgage or home equity line of credit into a fixed term?
For this type of question, our answer depends on your mortgage goals. As these types of products are based on prime rate, they remain unaffected by the recent rate changes as we are seeing an increase in only the fixed rates. The prime rate isn’t predicted to change until early 2014, so you should have about 6-9 months left to enjoy this low variable rate oasis. If that thought gives you anxiety, it may be a good idea to lock into a fixed term before the fixed rates increase even more. Or, if you can stomach the risk and think the past is any indication of the future, sticking with your variable rate mortgage could end up saving you interest in the long run. Whether you’re keeping your variable rate product as is or trading it in for a fixed rate term, my advice is to utilize your prepayment privileges by increasing your payment by even a small amount to reduce your mortgage principal while rates are still quite low. This way you can offset future rate increases by reducing your mortgage balance now.
How much does the rate hike affect my ability to qualify and mortgage payments?
Let’s talk about the real numbers affected by the rate hike. Last week, our lowest 5-year fixed rate was 2.79%; today banks are offering 3.39% for the same term. If the customer from last week had waited to apply this week for a $300,000 purchase, the maximum approved mortgage amount would be $17,000* lower as a result of the recent rate hike. In terms of how your mortgage payment would be affected, a $250,000 mortgage balance at 2.79% has payments of $1157 per month while the same mortgage amount at 3.39% would yield monthly payments of $1,234. That’s a difference of $77** per month and that’s not too bad. Moral of the story is, even though the rates went up, affordability is still there and monthly payments are still manageable.
How can I prepare myself for rising rates?
If you’re planning on purchasing in the next 4-6 months, get a rate hold now to lock in a rate which will insulate you from any future rate hikes. As long as you move in before your rate hold expires, you can save today’s rate and use it later. If your projected purchase date is longer than 6 months out for a newly constructed home, talk to your trusted mortgage professional about 9 or 12-month rate holds. We’ve been hearing of rising rates on repeat for a while now and what’s not gossip is the fact that mortgage lending guidelines have tightened. If you’re not thinking about interest rates for another year or longer, the best tips I can give are to reduce your debt as much as possible, keep your credit clean, and document your income. Mortgage rates, like the weather, are beyond our control. In order to “weather” the ups and downs, the best preparation is to ensure your appeal to lenders in the future and nothing is more appealing than a really strong mortgage application with a healthy down payment, good credit, and stable income.
As much as I wish I had a crystal ball to predict what’s going to happen with interest rates, that’s not possible so for now, you can include this article in your library of rate research. As always, I encourage you to talk to experienced professionals about your mortgage and real estate goals so you can determine a custom solution that suits your lifestyle.
*Qualifying numbers based on a $300,000 purchase price, no insurance premium included, 25-yr amortization, 5-yr fixed term. **Payments based on $250,000 mortgage amount, 25-yr amortization, 5-yr fixed term. Rates subject to change without notice.