Average mortgage rates jumped from 3.5% in April to 4.125% in July on 30-year fixed rate conventional loans, an increase of .625%. Due to increase in rates, home buyers have lost around 7.5% in purchasing power in just the past four months.
HOW RISING INTEREST RATES AFFECT BORROWERS AND AFFORDABILITY
Mortgage rates increasing, effects purchase power more than increasing home prices.
Chart shows the “impact of rising rates on buyer purchasing power or affordability”. Notice, when rates increase by just 1%, buyer loses 10% in purchasing power or affordability.
Example, notice the payment at 3.5% rate on a $400k loan, is about the same payment as 4.5% loan at $360k, buyer is losing 10% in purchasing power.
With rates increasing from 3.5% to 4.125%, a loss of 7.5% in purchasing power, means buyer who was pre-approved for a $500k home in April, can now only afford $462,500 today.
Why are mortgage rates moving up and will they move higher?
There are several reasons why rates are moving higher, recent concerns about Greece, China and events in Europe. Add in an improving labor market and economic conditions here in the US and our Federal Reserve looking to increase the Federal Funds rate, it is most likely rates will be going up later this year.
Keeping it all in perspective regarding Mortgage Rates
This chart by Freddie Mac shows how mortgage rates are still a bargain when you look at the past:
The average 30 year fixed mortgage rate over the past 40 years is around 8.7%, and 6.29% over the past decade.
Compare this to today’s rates at 4.125%. Mortgage rates in 2015 are still a gift and should be taken advantage of by anyone looking to borrow money to finance a home.
TIPS FOR HOME BUYERS OR REALTORS WITH CLIENTS THAT HAVE PRE-APPROVAL LETTERS
Because rates are moving higher, buyers who have been out shopping for homes over the past month or two, should get re-approved to make sure approval is still good, based on higher rates and payments. You don’t want a DTI problem or payment shock right as you are getting into contract.
If you are getting under contract soon, or you are a home owner with an opportunity to refinance in this market, I recommend locking as soon as you are able. Floating rates is risky business unless your loan officer is very close to the bond market.
As rates increase, homeowners with 30 year mortgages are switching to shorter term loans, as rates are much better for 20 year and 15 year term loans.
Freddie Mac’s chart below shows over the last quarter approximately 40% of U.S. households refinancing, moved out of the popular 30-year fixed rate mortgage, in favor of a shorter term. IE: 15-year, 20-year and 25-year fixed-rate loans.
Did you know? With rates today, homeowners with a 15-year loan term pay 64% less mortgage interest than with a comparable 30-year loan.
A 15-year mortgage requires just $28,000 of mortgage interest per $100,000 borrowed vs. 30-year loan pays $81,000 per $100,000 dollars borrowed.
Sometimes the payment on a 15 year mortgage is too expensive. A 20 year or 25 year fixed is also a great way to save interest over the term of a loan, Rates on a 20 year fixed are lower than a 30 year fixed, as the shorter the term, the lower the rate, with conventional loans.
If you need to get pre-approved for new home purchase or would like to see if a shorter term mortgage is a good fit, email or call me, I will show you the numbers and see if it makes sense.
Please feel free to contact me directly at 949.600.0944.