Mortgage Rates: Why Wait?

In June, the Federal Reserve confirmed that as the economy continued to improve, it would begin to wind down its purchase of mortgage-backed securities, a program designed to support the housing market by keeping mortgage interest rates very low.

Reacting to the Fed’s announcement, the average for a 30-year fixed-rate mortgage shot up to nearly 4.5%. Although that is almost a point higher than six weeks earlier, it is still historically low, and as the markets settle, rates should go back down a bit. We expect the 30-year loan rate to be 4.25% by year-end.

If you need a mortgage, lock in the best rate you can get now, and don’t worry about having missed out on the lowest-ever rates. Remember that a good, normal, 30-year fixed rate is 5%, but nobody wants to hear that when they’ve seen 3.5%.

Even in markets with double-digit increases in home prices, home values still haven’t returned to the housing market’s national peak in 2006. With a national median home price of $200,000 in the second quarter of 2013, home prices are still 34% below their peak nationally. According to a home-value and interest-rate analysis by Freddie Mac, homes are still affordable throughout most of the country, except for high-priced coastal California and the D.C.-to-Boston corridor. Freddie Mac said recently that mortgage rates would have to rise to nearly 7% before the median-priced home in the U.S. would be unaffordable to a family making the median income in most parts of the country.

Still, buyers who were on the edge of qualifying for a home may have to rethink their options. Monthly payments (of principal and interest) on a $200,000 mortgage at 3.5% are $898. At 4.5%, payments are $1,013: a $115 per month increase.  As rates rise, you could put off your home purchase until you see rates fall, but that’s a risky proposition if home prices rise in the meantime. If qualifying for a larger monthly mortgage payment isn’t in the cards, then you have a few alternatives: You can choose a less expensive home or increase your down payment to reduce the size of your loan. You can pay more points (one point equals 1% of the loan amount) to buy down your rate with prepaid interest. Or you can take out an adjustable-rate mortgage with a lower starting interest rate.

The ARM option. Adjustable-rate mortgages earned a bad reputation during the housing bust because of risky features, super-low teaser rates and super-high rate adjustments that no longer exist. Today, a hybrid ARM (the interest rate is fixed for a number of years and adjusts annually thereafter) is a safer choice.

Choose one with an initial fixed-rate period that matches how long you expect to remain in the home or keep the mortgage. In late June, the average rate nationally was 3.2% for a 3/1 ARM that adjusts after three years, 3.37% for a 5/1 ARM and 3.89% for a 7/1 ARM. Also, consider what the payment would be if the interest rate rises to the maximum allowed at the first adjustment (often to a cap of five percentage points above the start rate).

To help relieve rate anxiety, you can lock in your mortgage rate until you close. The longer the lock-in period (typically 15, 30, 45, or 60 days), the greater the cost — generally an eighth of a percentage point for every 15 days beyond an initial 15 days. Monarch Mortgage offers a free, one-time “float down” feature if rates decrease before closing.

If you already have a great relationship with one of our Regional Home Mortgage loan officers, thank you for supporting us and continuing to do so. We appreciate your business and the confidence you have placed in us. Please let your favorite RHM loan officer know how best to continue to serve your financing needs.

Send us your buyers for the most up to date loan programs, competitive interest rates, and advice in the market place.  Remember: friends don’t let friends use other mortgage companies!

-Mike Miller