There's no doubt about it. Rising mortgage rates have been a reality for the past few months, and the increases have some potential homebuyers worrying about affordability. But, there's no need to panic. Today's rising rates may be less worrisome than a lot of people believe.Click to see today's rates (Jan 16th, 2017)
Let's start with the basics.Â First, given a choice between low rates and higher rates, you always want the cheaper variety.
Second, the reports you have read are right: rates have risen. According to Freddie Mac, the cost of fixed-rate 30-year prime mortgages was 4.30 percent just before Christmas versus 3.44 percent on September 8th. That's a difference of .86 percent.
If we borrow $200,000 at 4.3 percent, the monthly principal and interest is $989.74. The same loan at 3.44 percent costs $891.40 per month, a difference of $98.34.
Okay, so what could possibly be good about this picture?
Let's say that in September 2016, a couple could afford $891.40 principal and interest payments. They could buy a home worth $250,000 with 20 percent down ($50,000) and a $200,000 loan.
If rates rise to 4.3 percent, and the buyers can still only afford $891.40 a month, their borrowing power has gone down. If they still put $50,000 down, they could buy a $230,128 house with no payment increase.
The big question is whether with higher interest rates, home appreciation will slow or even fall. If the answer is yes, rising rates may simply mean fewer competing bids and lower home prices -- in other words, the home that formerly fetched $250,000 may only sell for $230,128.
If this sounds unlikely, consider what the National Association of Realtors (NAR) reported for the third quarter of 2016 -- that existing home prices fell in 22 metros. And the third quarter ended in September -- months before mortgage rates really took off.
For 2017, the NAR is forecasting "minimal" gains. The organization's Chief Economist, Lawrence Yun, told HousingWire that "existing home sales are expected to see little expansion next year because of affordability tensions from rising mortgage rates and prices continuing to outpace income growth."
For those who wish to refinance, the goal is to find a replacement mortgage with better terms, or to switch from an adjustable-rate mortgage to financing with a fixed rate.
The marketplace reality is that refinancing levels are likely to fall as mortgage rates rise, especially today when many have already secured mortgages with very low interest rates.
That said, there will still be some refinancing, because even with today's higher rates, large numbers of borrowers can still get a financial advantage. Analysts at CoreLogic report that 23 percent of all existing mortgages in September had a rate of at least five percent.
Many borrowers with such loans can benefit from new financing at some point.Click to see today's rates (Jan 16th, 2017)
Most borrowers simply do not opt for adjustable-rate mortgages. According to Ellie Mae, just 3.9 percent of the mortgages closed in November were ARMs.
One central issue with ARMs is that borrowers worry that rates will rise in the future. It's a realistic concern, but consider this: you can get hybrid ARMs. These loans haveÂ fixed rates for three, five, seven or ten years before they adjust.
Taking a fixed rate loan when you don't need one can be costly. For instance, when 30-year fixed-rate prime loans were at 4.30 percent in December, 5/1 ARMs were atÂ 3.32 percent. That's nearly a full percent lower.
If you still own your home when the introductory fixed period ends, you'll have paid down part of your balance. Your new payment will be based on the remaining loan balance, and interest rate increases are limited by the terms of your loan. (These limits are called "caps.")
Freddie Mac said in the third quarter of 2016, the typical loan was repaid inÂ just 4.5 years. Many borrowersÂ will never worry about higher rates, because 5/1 ARMs don't begin adjusting for five years.
Back in 1981, the average rate for a prime mortgage was 16.62 percent. Seriously. And that's for well-funded borrowers who could put down 20 percent and avoidÂ mortgage insurance.
It might follow that with such absurd mortgage rates Â the housing market would collapse. But that's not what happened. In 1981, the country had 2.4 million existing home sales andÂ roughly 95 million fewer people than we have today.
Meanwhile, in 2017, we're looking at interest rates which are a fraction of what we saw in 1981.
â€śThe era of ultra-low interest rates is over,â€ť said Lawrence Yun, when the Fed raised bank rates in December.
â€śTodayâ€™s short-term rate hike will be followed by several additional rounds of increases in 2017 and 2018. Despite these moves, mortgage rates will not rise alarmingly. By this time next year, expect the 30-year fixed rate to likely be in the 4.5 percent to 5 percent range.â€ť
If it's any comfort, it's possible that mortgage rates will follow the pattern we saw in 2016. Remember that several Fed increases were predicted for 2016 and higher mortgage levels were widely expected.
Instead, there was just one Fed increase, and mortgage rates fell steadily for the first half of the year, going from 3.97 percent for prime financing at the start of January to 3.41 percent in early July.
So, when someone tells you mortgage rates will surely rise in 2017, forget tea leaves and economic forecasts and instead watch your local market. Keep your eyes on home prices and mortgage rates.
Today's mortgage rates depend on your borrower profile, the property you want to finance, and economic conditions worldwide.
Look at your budget and see how monthly costs add up. The realities of the marketplace may be very different when compared with the forecasts â€“ and a lot less frightening.Click to see today's rates (Jan 16th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Felicia M. Law Enforcement
The Mortgage Reports has been a valuable asset to me. I love that each topic is fully explained in terms that can be easily understood. I've learned more from this web site than from any first-time buyer education class.
Thaddeus C. Systems Analyst
I am an aspiring homeowner and The Mortgage Reports helps me daily. Thank you for your excellent information.
Jerolyn C. CPA
The Mortgage Reports isn't just basic mortgage rate information -- it's analysis on rate changes and trends, and updates on the laws in lending. Subscribing to the site's daily updates is worthwhile.
2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)