Vail Daily column: Sticking with my convictions
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 stress 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 Federal Reserve 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 thoughts, mortgage interest rates have remained low thus far into the fall of 2015.
When I say mortgage rates “have remained low,” that is obviously a general statement. There are countless ways and loan programs in which to finance a home. There are multiple ways in which to structure the interest rate. Generally speaking, mortgage interest rates range from the low 3 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 the fall of 2015 based on market indications and Federal Reserve actions.
BEATING THE DRUM WITH MORE URGENCY THAN EVER
I was wrong. But, I am still a man of my convictions, and I 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 Quantitative Easing Round 3, the Federal Reserve 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 is set to end in October.
Why have rates remained low in the midst of the reduction in government stimulus? Global unrest in places such as Iraq, Iran, 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 Federal Reserve backing off of their stimulus programs. As a result, mortgage rates have remained at these historical low points due to this increased demand from alternate investors.
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. (More on that at http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-to-grow-as-fed-buys-90-of-new-bonds.html). While foreign investment has made up for the reduction of purchasing by the Fed, any slip in foreign appetite for our bonds is troublesome.
Another astounding fact is that the United States national debt is over $18.3 trillion according to http://www.usdebtclock.org. This much debt is a harbinger of increasing inflationary levels which will automatically lead to increased interest rates.
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. 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.
A mortgage is no longer 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 longterm 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.