Interest Rate Hikes and You
We’ve all heard the media speculating that the era of cheap money is ending and rate hikes are coming. The financial press is churning out articles that discuss the effects of a rate hike on the stock market, bonds (including muni), and even on basic investment vehicles like common passbook accounts and CDs.
But what about the housing market?
I sat down with three mortgage brokers to talk about rising interest rates. In no particular order:
While their answers occasionally differed, there was a lot of overlap and agreement. So here you are, three mortgage brokers hashing through five good questions!
- Will rates rise this year, and how far may they rise?
All three brokers said that rates will rise, though they differed slightly in how much.
John Haydin of Waterstone Mortgage: John noted that we’re already seeing rate volatility and expects quite a jump by the end of the year. “[I’ve] seen minor fluctuations over the past few months. I see rates going into the 4.75% range by the end of the year.”
Ryan Boney of UWCU: Ryan agrees that rates will rise, but he sees a more modest increase. Ryan sees “…no higher than 4.5%,” though quickly adding that some analysis have “…[said up to] 5.0%.”
Don Madisen of PHH Home Loans: A clean sweep, Don also sees an interest rate hike in our near future. “Experts are saying as high as 5% by the end of the year.”
- How will rising rates affect fixed mortgage loans?
John Haydin of Waterstone Mortgage: “Borrowers will still be able to qualify for mortgage loans, but they may need to borrow less as a result of rising rates.” I asked him to explain further and he offered this chart.
|Assumption: 20% down, 30-yr amortization, payments are principal and interest only.|
|Purchase prices are rounded.|
“A borrower’s monthly payment of principal and interest only are in the far left column. Interest rates are on the top row. This a 30-year amortization, whether a 30-year fixed mortgage or an adjustable amortized over 30 years. Let’s say that a borrower wants to keep their principal and interest payments at $2,500 per month. They can buy a home for $654,375 at 4.00%. But if interest rates rise to 5.00%, their buying power drops to $594,375. That borrower lost $60,000.00 in buying power just because rates jumped a point.”
Ryan Boney of UWCU: Ryan stated that he believes that rate hikes will make adjustable mortgages more attractive. Before adjusting, adjustable mortgages are generally less expensive than fixed mortgages. Therefore, Ryan believes that rate hikes will make adjustable mortgages more attractive.
Don Madisen of PHH Home Loans: “Mortgage-backed securities tend to follow suit and will rise exponentially in concert with Fed Funds.” In simpler language, fixed-rate mortgages will become more expensive as the Fed hikes the rates.
- How will rising rates affect adjustable mortgage loans?
John Haydin of Waterstone Mortgage: Concurring with Ryan, John agrees that adjustable rates prior to adjustment are less expensive. ARM shoppers will find that “ARM rates about .5% lower than fixed, sometimes even lower.” However, John also states “ARM rates are much more volatile” and recommends carefully investigating any ARM before signing on the dotted line.
Ryan Boney of UWCU: Ryan notes that most homebuyers only live in their property for 5 or 7 years. Given this trend and agreeing with John’s 0.5% rate figure, Ryan again repeated his belief that ARMs will become more prevalent as rates rise.
Don Madisen of PHH Home Loans: Don, ever the number cruncher and Fed-watcher, concurs but offers more of an economic analysis. “Just as with [fixed rate mortgages], the same upward pressures will apply as the 10-Year Treasuries and the LIBOR begins to climb. As [Ten-Year Teasuries] and LIBOR [are] the index for most ARMs, we will see increases in ARMs as well.”
- Will rising interest rates prevent some buyers from obtaining a mortgage, or could previously pre-approved buyers lose their ability to purchase a home?
Finally, we have some disagreement among our experts!
John Haydin of Waterstone Mortgage: “In some cases, but not many. An example would be where a couple is purchasing a home, but the spouse is unable to be a part of the application due to [past] credit issues or an old distressed sale. Because only one income is being used to qualify, these borrowers tend to be pushing the limits of qualification more than others. Paying attention to your credit scores is more important now that it has ever been.”
Ryan Boney of UWCU: Ryan disagreed. “No, it shouldn’t [be a concern].”
Don Madisen of PHH Home Loans: Don takes more of a middle ground. “Not necessarily, but it can certainly lower their approved purchase and loan amounts.”
- I closed the discussion by asking John, Ryan, and Don for any final thoughts.
John Haydin of Waterstone Mortgage: “Yes. Please don’t worry about rates! This isn’t something that you can control, and consumers will purchase a home if they want to purchase a home. It doesn’t matter if the interest rate is 3% or the rate is 9% – they will still buy the home that they want.”
Ryan Boney of UWCU: Ryan differs with John. “This is the time to lock in your rate. If you wait, the rates will probably be higher and you will either have less purchasing power or will pay more for the same property.”
Don Madisen of PHH Home Loans: Don again takes that middle ground. “If you are on the fence, now is the time to buy while we still hover in the low 4% range. Impending Fed actions guarantee that 4% rates will not be here forever.”
If rates have you thinking that it’s time to make your move, please feel free to contact me. I’ll be happy to help you find a home before impending rate increases rob you of your purchasing power. Sellers, I’ll also be happy to help you learn how to use these impending rate hikes to sell your property more effectively with more money in your pockets!