The Federal Reserve’s (Fed’s) recent decision to forgo raising its short-term target interest rate has given Home Buyers a few more months to take advantage of historically low home loan interest rates. Today’s average rate for a 30 year, fixed rate mortgage was 3.85%… WOW !!
Compare that to the late 1980’s… when I first started selling homes… when interest rates ranged from 7.0 to 9.5%.
However, this recent decision by the Fed’s does increase the probability of Home Buyers seeing an increase in home mortgage rates this December.
As we’ve seen in the past, when the Fed is expected to tighten monetary policy in the not too distant future, mortgage rates can, and sometimes do, increase before the Fed actually makes any official adjustments.
“Those planning to get into the housing market in 2016 may want to consider a home purchase before the end of the 2015,” says Jonathan Smoke, chief economist for realtor.com®.
“When rates go up, not only will monthly mortgage payments increase, that increase will also lessen some buyers’ ability to get approved for a home loan – due to an increased debt to income ratio.”
Like today’s tumultuous weather forecast and the track of Hurricane Joaquin, the Fed’s predicted path for mortgage rates can often vary. But most analysts are predicting a possible increase of 50 basis points over the next 12 months.
If these predictions are correct, here’s Smoke’s analysis of the impact a 50 basis point increase will have on potential Home Buyers (based on this year’s most recent data)…
A 50 basis point increase in the effective mortgage rate could result in:
- A 6 percent increase in monthly payments on new mortgages. In May 2015, the average loan with a 30-year fixed mortgage was $231,000, which had a monthly principal and interest payment of $1,107 at the average interest rate of 4.03 percent. When rates reach 4.53 percent, that same loan amount would result in a monthly payment of $1,175, an increase of 6 percent.
- As much as 7 percent rejection of mortgage applications. The increase in the monthly debt burden as a result of higher rates will stress the upper limits of loan- and debt-to-income ratios for new loan applicants. “Based on analysis of loan-level ratios for a large sample of loans approved in the first half of 2015, as much as 7 percent of mortgage applicants would have failed to get approval as a result of higher debt-to-income ratios caused by higher rates,” says Smoke.
- Average debt-to-income ratio to increase by 4 percent. The average debt-to-income ratio for mortgages in the first half of 2015 was 35.5 percent. With an increase of mortgage rates by 50 basis points and keeping all other factors equal, the average debt-to-income ratio increases by 4 percent to 37.0 percent.
- Popularity of loan types will likely shift with rate increases. In the first half of 2015, conventional mortgages were most popular, capturing 50 percent of the market, followed by 31 percent FHA, and 12 percent VA. Under the modeled higher rate scenario, conventional and jumbo mortgages were most likely to hit an upper limit on debt-to-income ratios, and VA and FHA loans were least likely to hit an upper limit.
The potential impact to borrowers also varies dramatically by geography.
“High cost markets and markets where first-time buyers have been just barely able to qualify this year are most at risk of seeing more failed mortgage applications as a result of higher debt burdens triggered by higher rates,” Smoke added.
Most impacted markets (those with 10 percent or more by percentage of potential failed applications):
1. Honolulu – 14 percent
2. Stockton, Calif. – 12 percent
3. Fresno, Calif. – 12 percent
4. El Paso, Texas – 11 percent
5. Fort Pierce, Fla. – 11 percent
6. San Diego – 11 percent
7. Visalia, Calif. – 11 percent
8. Chattanooga, Tenn. – 10 percent
9. Los Angeles – 10 percent
10. Miami – 10 percent
11. Modesto, Calif. – 10 percent
12. Reno, Nev. – 10 percent
13. Sacramento – 10 percent
14. San Francisco – 10 percent
Fortunately for us… the Northern Virginia region is not included in this group of the most likely impacted markets.
So what’s the bottom line?
If you, or someone you know is thinking of purchasing a home anytime in the next 12 months… NOW… would be the… BEST TIME… to… CALL ME… even if you are currently in a rental lease. I’ve helped many buyers negotiate with their landlords for an early exit from their rental in order to take advantage of today’s lower interest rates. Plus, there are still ‘no money down’ home loans and numerous FREE ‘closing cost grants’ available. So don’t let a shortage of cash stop you from calling me… I can help you buy a home with zero money using these government programs. Read more about these programs at these links…
Then, give me a call on my direct line… 571-261-8480. Or, email me here.
“A trusted name in real estate… since 1986″