by Angelika Joenathan, information taken from various real estate sources.
Many of us have been surprised that rates have not risen already. From a business perspective, this is a good time to float long-term debt, probably the best time you’ll see for years and years to come. Short-term credit lines don’t need to be locked in, given the flat outlook for short-term rates.
Let’s assume the eventual increase in mortgage rate is 2% (the middle of that 1% – 3% window). What impact would that have on you as a home purchaser?
Today, interest rates are approximately 3.5%. A 2 percent increase would bring them to 5.5%. On a $300,000 mortgage, a buyer’s monthly mortgage payment (principle and interest) would go from $1,347/month to $1,704/month.
It’s an increase of $357/mo and an additional $4,284 each year and a total of $128,520 over 30 years. That is an amount of 32% downpayment on a $400,000 value home or condo. Think about it.
Forecast and Prediction:
- The first half of the interest rate forecast is very simple: short-term interest rates will remain in microscopic territory through 2013. Less certain is the outlook for long-term interest rates, most likely a story of rising yields.
- As the government starts to leave the mortgage market, private industry will step in. Private industry demands a higher rate of return on their investments. Mortgages will be no different. Studies have shown that 30 year mortgage rates could increase by 1 to 3% over the current rate.
- In many higher priced markets, rolling back Conforming Loan Limits means that rates for the mortgages on these properties will resort back to the rates on private jumbo loans. The FHFA informed us that last year, the difference between mortgage rates for jumbo loans and jumbo-conforming mortgages has varied between about ½ and ¾ of a percentage point. Just a ½ point increase in mortgage rate on a $500,000 mortgage means an additional $154.84 in your monthly mortgage payment; a difference greater than $55,000 over the life of a 30 year mortgage. It will cost more in mortgage payments if buyers are purchasing a home over the limit in a region where the limit changed.
- As the economy will continue getting better, the pressure to keep rates low to stimulate growth will abate and we shall start to see the distinct changes that will propel rates upward.
Skeptics may believe that the huge stimulus to the monetary base will eventually work its way into the money supply, and then to spending. That will eventually happen, but the current and near-future weakness of loan demand will delay that rebound. When the surge in money supply actually hits, then the Fed will have to raise interest rates.