Mortgage Rates Are on the Rise - But It's No Big Deal
For the first time in a long time, the nation is buzzing over mortgage rates - and it's not because they're dropping to new lows.
On the contrary, following comments made by Federal Reserve Chairman Ben Bernanke this week in which he hinted that the Fed may begin backing off its monthly, multibillion-dollar bond-buying measure known as quantitative easing as early as this year, mortgage rates shot up well over 4 percent.
This has a lot of potential homeowners panicking over whether it's too late to buy. Following the spike, Reuters reported loan requests for home purchases fell 3 percent, according to the Mortgage Bankers Association's seasonally-adjusted index, while the number of refinancing applications dropped by 3.4 percent.
Mortgage rates have been kept artificially low for a long time, and we all knew they had to go up at some point - except now that day has come, and many consumers are realizing they weren't ready for it.
If you're one of them, stop freaking out. The truth is rising mortgage rates are no big deal, and home financing is still incredibly affordable at today's rates.
Historical Mortgage Rates
David Howell, executive vice president and CIO at McEnearney Associates, Inc., says rates have finally bottomed out - from 3.35 percent for 30-year fixed mortgage at the end of April to the sharp increase to 4.46 percent at the end of June, which translates to a 12.6 percent loss of buying power.
However, interest rates are still extremely low, historically speaking. Howell adds that when his business opened in July 1980, mortgage interest rates averaged 12.71 percent and climbed all the way to 18.45 percent by September the next year. "But people still bought homes, and believe it or not, home prices actually rose slightly during that period of time," he says.
It's easy to become sucked into the short-term data when you're considering making what will likely be the biggest purchase of your life, but put mortgage rates into perspective, and it becomes clear that home financing is still ridiculously cheap. Even so, one thing is for sure: Rates are going up, and it's unlikely we'll see them return to the rock-bottom lows of previous months anytime soon.
Is it Now or Never?
Despite the fact that mortgage interest rates remain low, would you rather pay less for a house, or a lot less?
For home shoppers ready to pull the trigger on a purchase, it doesn't make a whole lot of sense to wait. However, those whose ability to buy a house is dependent upon a percent interest rate difference should reconsider whether buying a home is a practical financial move.
"The difference between the monthly payment for a 3.5 percent interest rate and a 4.5 percent interest rate on a $208,000 loan is $119.90 per month ... For the average home buyer, an increase in $119.90 is not going to make homebuying unaffordable," says Philip Georgiades, chief loan steward for VA Home Loan Centers.
If it does, you're honestly not in the financial position to buy.
Kirk Haverkamp, senior editor for MortgageLoan.com, recommends potential buyers focus less on mortgage rate fluctuations and keep an eye on rising home values, which can take a bigger bite out of buyers' wallets. "A 10 percent increase in home prices will increase your monthly mortgage payment by considerably more than a half percent rise in 30-year mortgage rates," he says.
And because the Fed has indicated it plans to keep a lid on interest rates for the next couple of years, "it could push up housing prices faster than expected as more people come into the market," Haverkamp says.
So before you toss aside your dream of becoming a homeowner, just because rates aren't the lowest they've been in the history of mortgage rates, remember that previous generations of homebuyers financed property at double-digit rates and did just fine.
Today's homebuyers are still poised to achieve the American Dream at a price we may never see again. As long as you're realistic about your ability to buy and what you can afford, rising rates should have little impact on your decision to go through with a purchase.
Casey Bond is the managing editor of GoBankingRates.com, a source for personal finance news, tools and the best interest rates today on certificate of deposit rates, savings account rates, mortgage rates and more.
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