Vail Daily column: Sticking to my guns
I am a man of my convictions. If you have spoken with me in the past year or so regarding mortgage financing, then you have heard me iterate that interest rates will be going higher very soon. You may have heard me say: “There is nowhere for rates to go but higher, or the Fed is scaling back their bond purchasing stimulus which will ultimately force rates higher, or with this much national debt, inflationary levels will start to rise soon which will take interest rates higher in unison.” Contrary to my convictions, mortgage interest rates have remained “low” thus far in 2014.
When I say mortgage rates have remained “low,” that is obviously a general statement. There are countless ways or loan programs to finance a home; there are countless ways in which to structure the interest rate. Generally speaking, mortgage interest rates are anywhere from the high 2 percent range to the high 4 percent range, depending on any number of these variables. If we had a conversation earlier in the year, I would have told you that this range of rates would be a half point to a full point higher by fall of 2014 based on market indications and Fed actions.
I was wrong. But, I am still a man of my convictions and am still beating the drum of mortgage rates increasing. In fact, I am now beating that drum with more urgency than ever. At the height of the Federal Reserve’s third round of bond purchasing stimulus program or of QE3 (Quantitative Easing Round 3), the Fed was purchasing $85 billion of mortgage debt each month from banks and lenders. Such purchasing kept mortgage interest rates at these very low levels. Currently that purchasing figure has been scaled back to $40 billion with all implications of the reduction continuing.
Why have rates remained low in the midst of the reduction in government stimulus? Global unrest in places like the Ukraine and Syria have kept investors purchasing United States mortgage debt at a healthy pace. This global purchasing of our debt has helped fill the void with the Fed backing off of their stimulus programs. As a result, mortgage rates have remained at these historical low points due to the increased demand from alternate investors on the secondary markets.
However, the factors I noted in the opening still ring true as a harbinger for higher mortgage interest rates. During the three rounds of Quantitative Easing, the Federal Reserve Board accounted for nearly 90 percent of the purchases of U.S. mortgage debt (http://bloom.bg/1n0ZCQm). Shockingly, the United States national debt is over $17.7 trillion (www.usdebtclock.org). Both inflation and interest rates will increase as a result of so much debt.
Consider this: On a $300,000 loan when the rate increases from 4 percent on a 30-year amortization to 4.5 percent, the monthly payment increases by $88 and the interest owed over the life of the loan increases by nearly $32,000. As that interest rate continues to increase, these numbers get more severe. Furthermore, as interest rates increase, a buyer’s borrowing capacity decreases, meaning the borrower qualifies for less of a loan amount and subsequently less of a purchase price. Not to mention the fact that any more money going toward the mortgage payment is less that could be paying down other debts or less that is being invested in retirement plans or investment accounts.
No longer is a mortgage simply a debt against one’s home. A mortgage and how it is structured is perhaps the biggest and most influential financial tool most of us have in our entire financial portfolio. Interest rate increases of even a quarter or half a point have significant ramifications for the immediate and long-term plans for the loan. Therefore, if you have mortgage financing needs, then it is best to address them sooner than later.
William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and firstname.lastname@example.org.