As I have been warning my readers here for the last several weeks, mortgage rates would go up, and they definitely have. In the last month, the 30-year fixed rate has gone up from 3.625 percent to 4.375 percent.
The reason for this is that the Federal Reserve has indicated that the low rate party may be winding down. Over the last several years the Fed has purchased trillions of dollars of mortgage backed securities which is where mortgage money comes from. In reality, a majority of us now owe out mortgages to the Federal Reserve Bank, even though we may make our payments to a servicer such as Chase or Wells Fargo.
The Fed appears to be planning a gradual winding down of these purchases, meaning there will be less supply of cash, and those issuing the mortgage backed bonds will have to offer a higher rate of return to attract capital, which means mortgage rates will go up until a happy balance of supply and demand is met between what investors will accept and what borrowers are willing to pay.
A big part of the equation is what will even the slightly rising rates do to the demand for money? So many homeowners now have low rates locked in that they will be reluctant to refinance unless they really need cash out of their homes to pay off other higher priced debt. I suspect there will be a decline in those who might buy a new home just for the sake of buying something bigger and nicer.
If a buyer can go from house to house with about the same rate they would have had doing nothing, they are more likely to do so, but if you have a 3.5 percent rate and have to pay much more for a new house and new loan, suddenly the old place might just suddenly acquire a look of genteel shabbiness vs. old and tired.
Indeed, this could be a sociological turning point where families that once moved every few years now spend decades in the same home. This could in some areas bring new stability to what have long been rapidly changing neighborhoods and demographics. If a particular area is seen by its residents as being in decline they might be more likely to fight to reverse the situation as opposed to just selling out and moving to greener pastures.
What does this mean to someone looking to buy a home? Let’s look at an example and also put things in historic perspective. Let’s assume you are looking at a $500,000 purchase and have $100,000 to put down and want a 30-year fixed loan for $400,000.
A month ago that loan would have cost you $1,824.21 per month. Today that loan would cost you $1,997.14 per month, or $172.93 more per month. Over 30 years, that adds $62,254.80 to grand total. But keep in mind that is only a 9 percent increase.
While that may be a shell shocker to some, those of us who have owned property for many years can’t help but be at least slightly amused at the angst. How many people reading this have had a mortgage at 8 percent in their lives? C’mon, be honest. If you owned property more than 10 years ago then you know who you are. And, to show my age, I’ll make a confession: My first mortgage was at 18 percent in about 1981. Even for those who recall 7 percent rates, that $400,000 would have cost $2,661.21 per month. Let’s hope we don’t see 7 percent anytime soon.
There are many factors that determine what buying a home is worth and how much of our disposable income we are willing to pay. For some, it is the quality of life and comfort of living in a lovely home in a good area. For others it’s the investment angle and tax savings. Home ownership is a way to build equity, and though homeowners have lost a lot of equity the last few years, real estate has always proven to be a good long term investment vs. paying rent. For some, it’s the security of not being at the whim of your landlord when it comes to staying in one place for many years in order to put down roots or raise a family.
Whatever the motivation, I don’t see increasing rates a point or two will lead to any long-term harm to the real estate market.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.