Buyers, Beware: Mortgage Rates Up Mortgage rates that once dipped below 5 percent have pretty much gone away, but don't expect rates to spike to 1980s levels now that the Federal Reserve has ended a program that purchased mortgage-backed securities to keep interest rates low, East Bay mortgage brokers say.
In just the past week, the average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent. As mortgages get more expensive, more would-be homeowners are priced out of the market — threatening the housing market's fragile recovery.
Many analysts forecast rates will rise as high as 6 percent by early next year. For people who bought their first home in the 1980s, when rates stayed over 10 percent for several years, paying 6 percent for a home loan may seem like a steal. But it's coming as a shock to many first-time homebuyers this spring.
Rates are going up because of the improving economy and the end of a government push to make mortgages cheaper.
"It's unlikely we are going to see interest rates below five percent moving ahead," said a mortgage banker. "The reason is that we are exposed to market movements now and the security blanket, which was the Federal Reserve, is no longer there."
And if you wanted to refinance at a super-low rate, you may have missed your chance. Mortgages under 4 percent are still available, but only for loans that reset in five or seven years, probably to higher rates.
"Although the federal program has ended, it's too early to say whether it will result in a rush among consumers to get home loans or refinance existing loans. Rates are still incredibly low. We've been spoiled by 4.5 percent and 4.75 percent rates and think 5.25 percent is a disaster, but really it's a great rate.
"(The lower) rates are going away. We already hit bottom and that was awhile ago," said one broker. "I think we have to keep things in perspective. Rates have been gradually rising since last summer."
For people putting their homes on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their purchases and lock in something decent before rates go even higher.
It's all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.
The rule of thumb: Every 1 percentage point increase in mortgage rates reduces a buyer's purchasing power by about 10 percent.
For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will get you a loan of only $270,000.
If you are waiting for the right time to buy a home, then this just might be that time...
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