Vail Daily column: Navigating the new world of higher mortgage rates
Since the election, it is as if the other shoe has finally dropped on the future of interest rates. Investors have been bailing from the bond markets, and in many cases simply abandoning bonds altogether. This has forced issuers of bonds to take less, which pushes up the eventual yield on the bond. Long story short, mortgage rates have jumped to their highest level in at least two, and heading toward, three years.
The days of a 30-year fixed mortgage loan with a rate starting with a three are long gone, although 15-year rates remain attractive (comparatively speaking anyway) with rates in the mid 3 percent range, but a 15-plus-year term will increase your monthly payment pretty dramatically. Thirty-year rates are in the low to mid 4 percent range.
This means on a loan amount of $400,000 the principal and interest portion of the payment has increased about $170 per month, just in the last five weeks. To many families, that’s equal to a weeks grocery bill and worthy of exploring any options out there.
Limited with 30-year loan
The fact is that very few homebuyers ever remain in a home, or the loan they started out with for longer than five years. Family dynamics, relocation, divorce and economic status all impact the desire to stay put it seems.
As such, do you really benefit from a 30-year loan? For the last several years the rate was pretty irresistible, even if you knew you might not be there for 30 years. The spread between an adjustable rate fixed for five to seven years and a 30-fixed was often only one-quarter percentage or so, and it seemed (and was) a solid idea to go for the fixed rate.
Assess the situation
But money is a life force of its own and will find its own way it seems. Investors are always looking for a bigger and better return and borrowers end up paying what the market will bare. As such, investors, who lend money to mortgage companies to make home loans, are demanding a much higher return on their money to lend it for 30 years at a fixed rate. But they are much more flexible on their return if they are only lending it at a fixed rate for five to seven years.
Currently, it’s now advisable for consumers to realistically look at their situation and ask themselves where they might be in five to seven years. If the kids will be gone, then will it be time to downsize, or if the kids are in grade school now, then will the family need a bigger house for accommodating the activities and friends of teenagers?
Loans that are fixed for five to seven years are generally still available in the mid 3 percent range and currently represent a pretty good bargain for those shopping for a home loan. After the five to seven year period, the loan adjusts annually and are tied to a specified market rate (such as the one-year LIBOR) plus a markup (or margin) with caps on the rate adjustment. Those caps can vary from loan to loan, and the margin and index can vary so be sure and ask lots of questions and read the fine print if you are considering such a move.
Adjustable loan benefits
These loans are also an excellent alternative for homeowners who currently have an adjustable loan that might be adjusting monthly or annually. The recent (and proposed) increases by the Federal Reserve will hit those loans pretty hard on future adjustments. Locking in the rate for five to seven years could be a move that saves a homeowner tens of thousands of dollars and gives the peace of mind when planning the family budget as to what the near future will hold.
If you have been complacent about your adjustable rate loan, then it’s time to take a hard look at the terms and possible impacts of a sudden jump in the rate and payment.
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 http://www.mtnmortgageguy.com.