October 24, 2017

Morgage Rate Update: Buy Now or Pay Later?

mortgage_chalk_boardIn a recent piece for The Washington Post, Kathy Orton highlights two studies that point out something I’ve been alerting my clients about recently: the impact of potentially rising interest rates. Truth be told, we’ve been hearing for years from mortgage experts and market analysts that mortgage interest rates will rise considerably in the near future, yet rates remain at historic lows. It is true that  we currently don’t have the absurdly low 3.5 rates that we had for 30-year mortgages in 2013, but for the past five years, rates are still very good.

But how much longer will that last? No one really knows, but the risk of waiting may be costly for many buyers and sellers if the purchasing power of buyers shrinks.

Zillow researchers explain:

If you’ve been on the fence about buying a home now or delaying your purchase until next year, you’ll want to pay attention to this: The house you can afford today may be out of reach a year from now due to rising interest rates and home price appreciation.

To put a dollar figure on it, Zillow applied next year’s forecasted home values and a 1 percentage point interest rate increase to the median home price in 35 metros around the country. We used that to calculate the difference in mortgage payments. The results may surprise you.

“More often than not, buyers do not understand the profound effect of rising interest rates on affordability,” said Erin Lantz, vice president of mortgages at Zillow. “Many buyers associate a 1 percentage point interest rate change with a 1 percent change on a piece of clothing or the price of a car, when in fact they are very different.”

As a rule of thumb, Lantz said, a 1 percentage point increase in mortgage rates reduces affordability by 10 percent.

annual_interest_ratesAccording to a Harvard University Study, the interest rate increase from 2013 to 2014 has already had an impact, slowing growth this year compared to last. But they note that there are bigger factors involved: “More fundamentally, though, the slow pace of the single-family housing recovery reflects steady but unspectacular job growth,” the report explains. Other impediments include the inability of many would-be first time buyers to come up with the necessary down payments required for many loans today.

Should the economy eventually pick up, interest rates and lending restrictions may have less of an impact, but right now, rates and loan terms are critical for many buyers.  And if you are thinking about selling, interest rates may impact the value of your home in the future because higher rates will mean  fewer buyers will be able to afford it.

Yet no one really knows what’s in store for 2015.  Even the “experts” can only make educated guesses.

That said, today’s still low rates make home buying attractive for those individuals who have the ability to make the payments.  As Harvard researcher Rocio Sanchez-Moyano points out in her blog post on this topic “affordability remains at unprecedented levels.”

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