Can rising mortgage rates be GOOD news?

Peter Miller
The Mortgage Reports contributor

Rising mortgage rates have a silver lining

Rising mortgage rates have dominated the first six weeks of 2018, and many in real estate predict still-higher interest levels ahead this year. The Mortgage Bankers Association, as one example, forecasts that mortgage rates will hit 4.8 percent before January 2019.

However, the “high” rates seen in early 2018 are not expensive by historical standards. No less important, for all the moaning about “steep” financing costs, there are a lot of people who will do well with today’s rates.

Huh? How can that be?

Verify your new rate (Dec 14th, 2018)

Perception and rising mortgage rates

In 2013, Standard & Poors calculated that the 40-year historic average mortgage rate had been 8.6 percent. That’s roughly twice the mortgage rate borrowers face as this is written. For a $150,000 mortgage, it means that the monthly cost for principal and interest will be $1,164.02 versus $742.31 at 4.3 percent. That’s a difference of $421.71 a month, or $5,061 a year.

Facts are nice, but the truth is that while rates today are far below historic norms, no one cares. 

Borrowers compare today’s mortgage rates to recent bargains and are disappointed. The annual rate for 2016 was 3.65 percent, the lowest interest level since 1971 when Freddie Mac began keeping records.

What mortgage rate history can tell us about the future

So, in a very real sense, borrowers should be elated with rates in the 4 percent range. But you know –and I know — that’s not how the world works. A lot of us are upset because mortgage rates are above 4 percent; they’re “soaring.”

Well, actually, mortgage rates are not soaring. Neither are monthly costs. Going from 4 percent to 4.3 percent means that the cost of a $150,000 mortgage moves from $716.12 to $742.31 a month for principal and interest. That’s an additional $26.19 a month.

The barrier here is not financial for most borrowers, it’s one of perception.

No one wants to pay $2 for a carton of eggs that once could be had for $1.75. The same with mortgages.

Realistically, though, if you agree that rates are likely to go higher later this year and in 2019, now is the time to speak with mortgage lenders.

The DTI limit

An extra cost of $26.19 a month is not a big issue for most borrowers, but it is for some. The problem has to do with the debt-to-income ratio or DTI.

Lenders will allow a certain percentage of your gross (before tax) income for recurring monthly debts. For instance, if you have a gross household income of $8,000, and your lender allows a 43 percent DTI, you can spend up to $3,440 for housing costs plus monthly bills like auto payments, student loans, and credit cards.

Your DTI tells you how much you can afford to spend on a home

As it happens, debt is soaring. According to the Federal Reserve Bank of New York, “Household debt increased by $193 billion (1.5%) to $13.15 trillion in the fourth quarter of 2017. This report marks the fifth consecutive year of positive annual household debt growth.”

For borrowers, more debt means larger monthly payments and that can lead to DTI problems. If you’re over the DTI limit, you’ll have a tough time getting a mortgage. The solution is to cut monthly spending, pay down bills (especially credit cards), and improve your DTI.

Smaller pipelines, looser guidelines

If you got turned down for a mortgage in 2017, you might find acceptance in 2018. The reason is that as rates go up,  mortgage volume tends to fall.

Your next steps when turned down for a mortgage

This is a problem for lenders because they need volume to maximize profits. So as rates rise, borrowers who once might have been — or were — declined are now celebrated and applauded.

Less competition

For most people, there’s a balance of sorts between monthly mortgage payments and affordability. If you can comfortably pay $1,000 per month for principal and interest, it means that at 4 percent, you can roughly afford a $209,450 mortgage. Raise the rate to 4.3 percent, and your borrowing power declines to about $202,050.

Rising rates have the effect of pushing down demand. The National Association of Realtors (NAR) estimates that each .1 percent mortgage rate increase reduces sale volume by 35,000 units. Going from roughly 4.0 percent to 4.3 percent means that more than 100,000 potential buyers have been axed from the market.

How to buy a house in a hot market

With less demand, there is less pressure to force up prices. In some markets, prices may actually fall. If you see sales taking more days on the market and a decline in multiple offers, then you may be able to buy property at a lower cost.

With today’s inventory shortage, the pressure to reduce home prices won’t happen quickly or automatically. No doubt some buyers will pay less for property and with lower prices, they will need to borrow less. The good news is that smaller mortgages can mean lower monthly costs – even with rising mortgage rates.

What are today’s mortgage rates?

Current mortgage rates are the highest they have been in four years. However, four years ago, no one was looking at the rates and calling them “soaring” or “high” because they were not on their way up. It’s important to see things as they are, not as they were. And shop with multiple mortgage lenders to get the best deal available today.

Verify your new rate (Dec 14th, 2018)