Over the last month mortgage rates have moved steadily higher, and over the last week rates have spiked to the highest point in the last 2 years.
For most of the last year rates have been stable and hovering around 3.5% (before pricing adjustments). This has been a result of the Fed’s program to buy mortgage backed securities (which determine mortgage interest rates) as a way to stimulate the economy by driving down mortgage rates. The concern has always been: What will happen when the Fed pulls out of the market? The experts have expected that rates will go up over time, but that the rise would be gradual. Rates moved higher over the last month when the Fed indicated that the economy was growing at a good pace, and they expected to start tapering off of the stimulus program by the end of the year. This last Wednesday, Fed Chairman Bernanke spoke more on this issue. The expectation going into the Fed meeting was that he would try and calm the markets and dial back on the comments about pulling support. Instead, he went further. The result has been panic in the bond markets, especially the mortgage backed securities markets.
Since then we have had waves of selling, and virtually no institutional buying. We have had multiple re-prices for the worse each day (re-prices are when the rates change during the day) since last Wednesday, and the market on Monday opened up down over 100 basis points points (which is the equivalent of over .25% increase in rate). The market improved later in the day, but right now mortgage rates for the best borrowers are in the high 4s, near the highs for the last 2 years.
If you have already been pre-approved, it makes sense to talk with your loan officer and make sure exactly where you stand. The higher rates mean higher payments so you may not qualify for as much as you did before.
If you have a contract on a home and a transaction in progress, make sure you are locked in and that your lender locked in your rate with the investor. In the past when we have seen sharp and sudden rate increases, there have been mortgage companies that went under and loans that fell apart at the closing.
Make sure you are protected.
This may be a good time to consider an adjustable rate mortgage. ARMs have a bad reputation, but they are often the best option for many buyers. There are adjustable rate mortgages which are fixed for 5, 7 or even 10 years, before adjusting their rate. The interest rates are much lower, and most people won’t stay in a home (or the mortgage) for the full 30 years. Once the rate changes, if you are still in the mortgage, there are caps on how high the rate can go each year and over the lifetime of the loan.
Put this in perspective. Rates are much higher than where they have been lately, but we are still near all time lows. Home buying is still very affordable.
Markets usually go to extremes, and it is likely that they are over-shooting to the high side now, and that at some point we will ease back down, at least to an extent. But no one knows if or when that will happen. If there is anything I can do to help, Please let me know.
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