Mortgage Rates Are On The Rise!
Since 2011 and the financial crisis, mortgage rates have jumped to their highest level, averaging 4.61% for a 30-year fixed-rate mortgage from 4.55% last week, according to data released last Thursday by mortgage-finance giant Freddie Mac. Interest rates in late 2012 bottomed out at 3.31% and have been as low as 3.99% as recently as January. This spike this year has been quicker than many economists predicted as a surging economy, the prospect of wage gains and a steep rise in prices for commodities such as lumber and gas.
The concern among economist is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said. Even a small increase of one percentage point can cause a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers.
To put into perspective, what might seem like a small increase in mortgages rates can have significant effects on your monthly payments. A 4% rate on a $250,000 loan translates to a monthly payment of $1,194, according to LendingTree Inc. At 5%, this monthly payment would go up to $1,342, excluding taxes and insurance.
Mortgage purchase applications fell 2% in the week ended May 11, the fourth straight weekly decrease, according to the Mortgage Bankers Association. While in a typical market buyers can simply choose to buy a smaller, less expensive home, that is a challenge in today’s market because inventories are near all-time lows. With the lack of affordable homes on the market, this gives buyers less wiggle room. Mortgage refinancing activity has also slowed dramatically. The pool of homeowners who would qualify for and benefit from a refi has shrunk by roughly 46% so far this year, according to mortgage-data and technology firm Black Knight Inc.
All of this could prompt lenders to ease credit standards to try to increase the volume of loans to new borrowers. Standards are still currently high, but lenders should be cautious about easing them so late in the cycle, especially since that could spur more demand in a market already suffering from tight supply, stated by Sam Khater, chief economist at Freddie Mac. “If we get additional loosening of underwriting its just going to gin up price pressures, and this is where we have to be careful,” he said.
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Kusisto, Laura, and Christina Rexrode. “The Era of Low Mortgage Rates Is Over>.”Realtor.com®, Realtor.com, 18 May 2018, www.realtor.com/news/real-estate-news/era-low-mortgage-rates/.
