Rates on 30-year fixed-rate mortgages averaged 4.37% for the week ending July 18, according to Freddie Mac’s weekly survey of conforming mortgage rates. That’s down slightly from the average a week earlier, but up more than a percentage point from early May.
While it isn’t yet known how the rate increase may have affected overall housing sales, the volatility been a reality check, a reminder to would-be buyers that low rates won’t be around forever, said Jessica Edwards, Coldwell Banker Real Estate consumer specialist.
It’s causing others to back out of deals in progress.
For example, two of Ellie McIntire’s short-sale transactions have fallen through the past couple of weeks. The Baltimore-area real-estate agent, who specializes in short sales, said that rising rates are to blame.
In a short sale, the sellers owe more on the mortgage than the home is currently worth, and their lender agrees to accept less than the full mortgage payoff at closing. In McIntire’s cases, after waiting for at least 60 days for the banks to accept or reject their offers, the buyers decided they couldn’t afford to wait any longer and pulled out of the process, she said. Without an agreed upon contract price, they couldn’t secure financing.
“They had gotten to the 4% [30-year fixed-rate mortgage rate] mark and decided they wanted to find a home that was a standard transaction,” not a short sale, McIntire said. With a traditional sale, the home seller approves the offer, not the bank, so the process can move more quickly.
Forty-one percent of home buyers said rising mortgage rates were their No. 1 worry, according to a survey of more than 2,000 people conducted in late June by real-estate website Trulia.
Of the respondents who plan to buy a home someday, 13% said a mortgage rate of 4% would be too high and 20% said a mortgage rate of 5% was their limit. Another 22% said rates would have to reach 6% to discourage them from buying a home
What a higher rate means for your bottom line
The monthly payment on a $200,000, 30-year fixed-rate mortgage at 3.35% (what it averaged in early May) is $881. When the rate goes up to 4.46% (what it averaged in late June), the monthly payment is $1,009, according to calculations from Trulia’s chief economist, Jed Kolko.
Or consider this rule of thumb: For every $100,000 borrowed, a percentage point increase in rate means an additional $83 a month in your monthly mortgage payment, said David Zugheri, executive vice president at Envoy Mortgage in Houston.
Is that enough to stop someone from buying a home? Maybe not. But it will likely make someone stutter and reconsider the purchase, he said.
Even a smaller jump can be felt in a borrower’s monthly budget.
Kay Brungs closed on a one-bedroom condo unit in Chicago’s Streeterville neighborhood on July 3. When she started the process of financing her purchase, she qualified for a 30-year fixed-rate mortgage rate below 4%. She wanted to lock then, but her loan officer at the time told her to hold off, that lower rates could be coming. In the meantime, rates jumped, and she ended up with a 4.23% rate at closing.
Now she’s paying for it.
“It’s not monumental or game changing, but it’s $45 month that I’m not going to have,” Brungs said.
That’s also $540 a year, or $2,700 over the course of five years.
Rates could start to move more gradually
Of course, no one knows exactly what rates will do in the weeks and months ahead. That’s the scary part.
The comforting part is that while rates will most certainly trend upward in the long term, they might not reach 5% with great speed, said Erin Lantz, director of Zillow Mortgage Marketplace, a mortgage shopping website.
“What we expect is for rates to move up to around 4.5% to 5% in the next 12 to 18 months,” she said. “What the federal government is aiming to get to is a stable, less volatile interest rate level.”
What’s more, many in the mortgage industry think the Federal Reserve may still be buying bonds, helping mortgage rates to stay low, for the next three years or so, Zugheri said. So while rates may be higher than earlier this year, there’s a good chance they’ll stay low for a while, relative to their historic averages. (It’s worth noting that from 2003 through 2006, generally strong years for the housing market, the average rate for 30-year fixed mortgages generally hovered between 5.5% and 6%.)
It’s also worth noting that while fixed-rate loans have experienced large swings, adjustable-rate mortgages haven’t been quite as volatile, said T.J. Freeborn, mortgage professional at Discover Home Loans. People planning to live in a home for no more than five to seven years might view an ARM as a good choice, since they will likely move before the rate resets, she said.
If you’re in the market
Don’t panic if you’re home shopping right now. Rates might not be at the bottom, but they’re still very low.
Just make sure you budget for interest-rate fluctuations, Zugheri said.
“The best advice I could give to a would-be home purchaser is, when factoring your monthly payment, throw on an extra $100 per $100,000 borrowed…and mentally be prepared for that,” he said. “What it might do is drive you to buy a less expensive home, it might drive you to put more money down, it may change your behavior and you may start looking at different neighborhoods.”
And make sure you trust the loan officer you’re working with.
In retrospect, Brungs thinks if she switched sooner she would have locked a lower mortgage rate. Don’t be afraid to move on if you’re not satisfied with the person you’ve picked to originate your loan.
Better yet, by getting preapproved before you’ve even started home shopping, you can get a sense for how the lender treats you and decide whether you want to stick with them until closing, Lantz said. Pay attention to how responsive they are to your calls and how reliable they are, and make sure you like their style of explaining the mortgage process, she said.