When mortgage rates jumped last month it sent many buyers into a tizzy. It’s a confusing situation. Rates were pretty steady in the 3.25-3.75% range for quite some time, then over the course of one month they skyrocketed, hitting above 4.5%!
Today they remain in the mid-4% range. So, what’s going on? Are they going back down to the desirable 3s? Are the going up even higher? How will we afford to buy now?
Let’s take a brief look at what’s happened. Going back as far as January 2012 rates hovered around 4% before dropping to the 3.25-3.5% range.
This recent spike took everyone by surprise. In fact, while the experts did predict rates would start going up, they did not predict the current range around 4.5% to occur until the third quarter of this year.
What exactly caused the spike is uncertain. However, on June 27 the Washington Post shined some light on what might have happened and what a potential short-term outcome may be.
‘It’s unclear right now how much [the rise in rates] is a step up of the level or how much is just uncertainty,’ said Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association.
In the short term, the rate increases could accelerate competition in an already hot housing market that’s had double-digit price increases for nearly a year. But the higher costs may push homeownership out of reach for others.
Buyers who can still afford the jump in mortgage rates will likely feel more motivated to find property quickly, in case rates rise even more. Some buyers may take this as a cue to stay put, as now they can’t afford as much home as they could with the lower rates.
To put this into perspective, below is a graph that shows how the cost of one’s monthly mortgage + P&I would change for a home ranging from $100,000-500,000 and rates ranging from 4.5-6%
Does this graph mean rates are going up to 6%? Not necessarily. However, Doug Duncan, the Chief Economist for Fannie Mae has been quoted as saying,
I don’t think the Fed ultimately would be troubled with a 6.5% mortgage rate.
Frank Nothaft, the VP and Chief Economist at Freddie Mac said,
As the economy continues to improve, we expect to see continued upward movement in long-term interest rates…At today’s house prices and income levels, mortgage rates would have to be nearly 7 percent before the U.S. median priced home would be unaffordable to a family making the median income in most parts of the country.
What does he mean, at today’s house prices and income levels? Well, believe it or not from the first quarter of 2004 to the first quarter of 2013 income and rental prices have noticeably increased whereas nationwide housing prices are only at the same place they were in 2004. With an increase in income and housing prices remaining low maybe more people can afford to pay a higher mortgage rate (not saying that they want to).
In fact Trulia surveyed 2,000 people about their feelings on the mortgage rate issue and 41% said it was their number one concern.
Of the respondents who plan to buy a home someday, 13% said a mortgage rate of 4% would be too high and 20% said a mortgage rate of 5% was their limit. Another 22% said rates would have to reach 6% to discourage them from buying a home
– Amy Hoak, Mortgage rates now a buyer stumbling block
When I bought my condo in 2008 our original rate was 6.5%. We have since refinanced and are happy with our current rate, but immediately following the refi transaction we compared how much it cost vs. how much we saved and at the time weren’t very impressed with the result. My point is don’t get too caught up in numbers. They are constantly fluctuating and when it comes down to it real estate is
- A long-term investment. You may lose some money on a transaction today, but you might recover it two-fold in your next transaction down the line. Until you cash out and no longer own real estate it’s just a paper loss.
- A life decision. At the end of the day which is more important, extra cash in your wallet to buy something frivolous and fun or a secure happy homestead?
Another interesting piece of information to consider is the infographic below.
Rates are still at a historical low. In fact they didn’t see a dramatic drop until just a few years ago. The rates may be around 4.5% now, but even if they go back up to 6% they will still be lower than they had been from 1972-2012.
If your concern is that the rates are going to be too high for you to move try to take a step back and really assess your situation. Consider all the reasons you want to move, maybe it’s for more space or a better school district. Imagine what life would be like in the long run if you do make the move, will you have more time, will your day-to-day routine be more relaxed? Then think very carefully about how your finances will change. Is spending a few hundred more on your mortgage each month worth it to you?
Deciding whether it is the right time for you to buy or make a move can be a difficult decision. I think most people want it to be a black and white decision based on numbers, but in the end it is your home, it is very closely tied to your emotions, so you need to look carefully at both your emotions and finances and find the balance where they support each other the most. When you see that and accomplish it you will be ready to make a move. If life affords you the luxury to, take your time and buy that dream home when you are truly ready.
Charts and graphs from www.keepingcurrentmatters.com.