Feb. 2, 2018.
For the fourth straight week, leading us into February 2018, mortgage interest rates have risen.
Freddie Mac data confirms that the 30-year fixed-rate mortgage has risen over a quarter of a percentage point, or 27 basis points, since the first week of 2018. 30-year fixed mortgage rates, averaging 4.22 percent in February 2018, have risen for four weeks in a row and are now slightly higher compared to what they were one year ago in early 2017. In one month, the 15-year fixed mortgage rate has also risen from around 3.38 percent in early January 2018 to around 3.68 percent in February 2018.
Rising mortgage rates may ring alarm bells for homebuyers, but many loan officers consider the rate upswing to be positive for both homeowners hoping to sell and for first-time buyers. “Generally, when rates are rising, it is good news for the housing market!” Lori Richardson of Cornerstone Home Lending, says. “It means that the economy is growing and getting stronger.”
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How will rising mortgage rates affect the housing market?
While rising rates do affect a buyer’s purchasing power, Richardson says, it’s also true that, nationally, most homeowners currently have 20 percent or more home equity. By the end of 2017, homeowners’ usable home equity had risen by $3 trillion from the market lows of 2012 to reach an all-time peak. Ben Graboske, Executive Vice President of Black Knight Data & Analytics, estimated that over 80 percent of homeowners in the U.S. had available home equity to tap into.
In Colorado, the state where Richardson and her team lend, she says that 90 percent of homeowners have at least 20 percent home equity. “Even with slightly higher rates than we’ve seen in the last couple of years (which are still historically low), many homeowners are in a great position to move up, downsize, or invest this year,” she explains.
Nancy Moreland of Brookhollow Mortgage Services agrees that a rise in mortgage rates isn’t necessarily negative.
“I don’t see rising mortgage rates as a bad sign,” she says. “The benefits of homeownership seem to always outweigh the fact that the rate and payment will become higher. If you look at the history of mortgage rates over the past 25 years, you will see the 30-year fixed rate varying from a high of almost 9 percent to a low in the 3.5 to 3.75 percent range.” Even accounting for the housing bubble, the housing/mortgage collapse, and the fluctuation in rates, Moreland says there are always buyers.
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“Sure, it’s great to hit the market at the perfect time and get the very lowest rate. But to attempt to time a home purchase perfectly with a mortgage rate will probably just result in paying a higher price for the home as home prices in most markets continue to rise,” Moreland says.
What do rising rates mean for anyone planning to buy a house in 2018?
“Today’s rates might not be the lowest ever,” Richardson says. “But they are still historically low, which is great for our clients.”
Crunching the numbers can put the rise in mortgage rates into perspective. Moreland explains that a 1 percent increase in a mortgage rate may equate to a $163 per month increase in a mortgage payment on a loan amount of about $275,000. Compared to the possible increase in the price of housing, Moreland says that paying an extra $163 a month is not a significant difference.
With that in mind, experts are predicting a continued increase in mortgage rates. At the 2017 annual convention of The National Association of Realtors, Chief Economist Lawrence Yun estimated that mortgage rates would rise to an average of 4.5 percent in 2018.
For buyers, an increase in mortgage rates can affect:
- Purchasing power. Waiting to buy may mean your money won’t go as far later in the year. Richardson reminds buyers that, compared to recent history, mortgage interest rates still appear solid. “Average mortgage rates over the last 40 years have ranged from 6.29 percent in the 2000s all the way to 12.7 percent in the ‘80s! Our clients today can still enjoy a purchasing environment where rates are much lower than their sibling or parent got.”
- Personal assets. Real estate also has the potential to significantly impact personal net worth, Richardson explains. “Waiting means that you don’t own the asset, which means you are missing out on growing your investment,” she says. Results from the Home Price Expectation Survey 2017 show that a homeowner could potentially see their assets grow by $44,905 by 2023 based solely on the growth of their home equity.
- Home prices. The connection here is simple, Moreland says. With higher rates come higher housing prices. For example, a homebuyer who takes out a $350,000 loan at the current interest rate of roughly 4.25 percent may pay around $2,200 a month in mortgage (depending on a number of factors that include credit score, down payment, loan type and term, and more). Waiting to buy after mortgage rates and housing prices go up could increase the same loan amount to $365,000 with a potential 4.62 interest rate and around a $2,373 monthly mortgage payment.
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This begs the question: Is it a good idea to purchase now before rates and home prices climb higher?
For prospective buyers at a crossroads, it’s a strong possibility. Richardson suggests talking to a good lender first who can show you all of your options. This can help you to make the right financial decision for yourself and your family. “Ultimately, what’s most important is to make sure our clients are equipped to make the right decision for their situation, whether it’s buying now or waiting,” she says.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.