This is a question everyone seems to be asking – are mortgage rates going soon? And what does this mean to you? This week, mortgage rates hit 2013 lows. Mortgage rates have been at or near record lows for a long time now. Interest rates have been staying low because the Fed keeps buying Mortgage Backed Securities and Treasuries to keep the rates low to stimulate the housing market and the economy in general. The general consensus is that the Fed will continue to buy until they see an improvement in the unemployment rate.
What does this mean for potential home buyers? It means, get off the fence and buy now (or as soon as you are able). These record low interest rates really increase the affordability of a home. In Phoenix, home prices hit bottom in August/September 2011. Prices have been steadily going up since that time but are still WAY below prices at the peak of the market. Many people are holding off to see if interest rates are going to drop even further. My opinion is that is a dangerous game to play for three reasons. Reason one: prices are going up every month while you are sitting back waiting to see if the record low interest rates are going to dive even lower. Reason two: once interest rates start rising, there will be no turning back. At today’s rate, every 1% the mortgage rates rise will cost a buyer approximately $60/month for every one hundred thousand in purchase price. So, if you are wanting to buy a $400,000 home, a 1% increase in rate will cost you $240/month ($60 *4). Reason three: if you are looking to get an FHA loan (this loan program allows for a low 3.5% down payment and more lenient debt to income ratios than a conventional loan), you want to try to get a full mortgage application no later than June 2. This is because on June 3, FHA guidelines for mortgage insurance premiums are changing. When you get an FHA loan, you pay mortgage insurance (because of the low down payment) and currently, the mortgage insurance is automatically cancelled when the loan reaches 78% of it’s original value. Starting June 3, mortgage insurance will remain for the life of the loan. This means the only way to get rid of it is to refinance and by the time you have achieved that loan to value ratio, rates will surely be higher.
What does this mean for potential home sellers? It means, get off the fence and sell now (or as soon as you are able). Many sellers are holding off listing their homes now because they see that prices are rising and they think they’ll be able to get more for their home in 4, 6, 12 months, etc. Will they be able to? Maybe, but at what cost? The current record low interest rates are doing three positive things for current sellers. First positive thing: It is creating an environment where there is more demand than supply for good quality homes. This is causing a seller’s market which means continuing increase in prices, competitive offer situations (bidding wars) for many homes, and lower days on the market. Once interest rates increase, inventory will likely level off and the market will no longer be a seller’s market. Second positive thing: It is creating a larger pool of buyers who can afford YOUR house. Once interest rates increase, homes become more expensive to buyers and the number of buyers who can qualify for a loan in the price range of your home decreases. Also, the number of people who can technically qualify but don’t feel comfortable spending what they’d have to in a mortgage to afford your home decreases. Third positive thing: Once you sell your home, you can buy your next home at today’s record low rates! This is especially good news if you are looking to upsize. If you are upsizing, don’t wait to sell. Why? Let’s say home prices go up another 3% in the next 6 months. If you sold now, you’d get 3% less for your current home than if you waited 6 months, BUT, you’ll be buying your newer, bigger, more expensive home for 3% less AND you’ll be doing it at todays low rates – who knows what interest rates will be in 6 months. Let’s do an example: You sell your current home for $250,000 today and buy a $375,000 home putting 20% down. Your mortgage payment (principle and interest) on your new home at today’s rate will be about $1,350. If you wait 6 months to do the same thing and prices go up 3%, you’d be selling your current home for $257,500 and buying your new home for $386, 250. If you put 20% down, your mortgage payment for the new home will be $1,390 and that’s assuming interest rates stay the same and don’t go up. If they even go up half a percent, the payment would be $1,475. So, by waiting, you will be able to get $7,500 more for your current home, but will have to pay $11,250 more for the new home – so on a net basis, it will COST you almost $4,000 to wait. Additionally, your mortgage payment will be $40 MORE per month if rates stay the same and upto $125 MORE per month if rates go up only half a percent.