Vail Daily column: Mortgage rates likely to increase this year |

Vail Daily column: Mortgage rates likely to increase this year

Since 2007, the financial markets have probably seen more stress, challenges and creative Band-Aids and home remedies to cure their ills than any period in history. The success of all these efforts is something economic historians will debate for decades, vs. what might have happened if the free markets were left to find their own balance.

Many believe the pain might have been sharper but of shorter duration had governments not intervened, but there is substantial evidence that might not have been the case either, and things could have gotten a lot worse and recovery would have taken years longer.

But as grassroots recovery takes over government intervention, investors are starting to demand more for their money, and that is showing up in mortgage rates. Money for mortgages comes from lenders selling bonds that are paid back by the stream of payments coming from a pool of homeowners.

To attract investors, these bonds have to offer a return that is attractive and competitive. Because these bonds are insured by the Feds (at least implicitly), they offer a safe harbor in times of uncertainty and that has been attractive to investors more worried about the return of their money vs. the return on their money.

As new investment opportunities appear, bond issuers have to offer a higher return to attract the necessary capital. That cost gets passed onto borrowers via higher rates. In the past month, we have seen rates on home loans increase about ¼ percent to 3⁄8 percent to the low 4 percent range. Some mortgage industry observers think rates might go up to the upper 4 percent range by the end of the year.

Support Local Journalism

This increase appears it may have some legs this time and be sustainable. This also means that short term rates, such as the LIBOR (which stands for the London Interbank Offering Rate) will undoubtedly start to rise.

Right now there are millions of adjustable rate mortgage loans out there that homeowners have been reluctant to give up because of the low rates tied to the LIBOR. In many cases these rates are in the low 3 percent range. There are going to be some rude awakenings as these loans hit their anniversary dates in the next few years and start adjusting upwards.

Take a $350,000 mortgage for example that is seven years old at the current rate of 3.5 percent with a payment of $1,571 and a remaining balance of about $298,000. Such a loan probably has an adjustment cap of 2 percent per year. If that rate went to 5.5 percent, then the payment could jump to $1,905, a $334 increase. If that loan was refinanced now at, say, 4.25 percent, then the payment would actually drop to $1,465. That’s lower than the current payment and $440 lower than what it might adjust to.

The reason a payment can drop even if the rate is higher is, in this case, the loan balance is lower than the original loan and we are starting over on a 30-year term. If your goal is to pay it off in about the same amount of time, then we could set up a 25-year term and the payment would be $1,614, which is only $53 per month higher and locks in your rate. The 15-20-year terms are popular as well.

If you have an adjustable rate and wait until it adjusts upwards, then you are going to probably pay a much higher rate to refinance it than if you do so now.

Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at

Support Local Journalism