Charleston real estate mortgage rate outlook, November 17, 2009
Mortgage rates for either conventional or FHA 30 year fixed rate loans are currently quoted below 5% but how long will rates stay this low.
Dan Green at The Mortgage Reports talks about 2 trends in mortgage rates. First, based on historical data from Freddie Mac, rates rise from January through August and fall in the fall (like leaves). One of my preferred lenders is quoting 4.75% today for both conventional and FHA 30 year fixed rate loans. But Dan says there is no good reason for there to be low mortgage rates because the dollar is weak, gold reflects a fear of inflation and stocks have been soaring since March. Incidentally, Meredith Whitney, who famously was very bearish on the financials before almost anyone else has just turned bearish on the market once again in an interview with CNBC.
The second trend is even more important if you are thinking about buying a home for sale in Charleston or if you are thinking of refinancing. That trend is that rates rise much faster than they fall. And Dan says that we could be looking at 7% mortgage rates in a flash.
Here's one reason why.
The Federal Reserve set out last year to encourage lower mortgage rates to help stabilize the housing market by pledging to buy bonds backed by home loans. Purchases of mortgage backed securities by the Fed have brought down yields. But the Fed plans to slow the pace of buying and said in a statement on September 23rd that it is scheduled to end the purchases sometime in the first quarter next year.
What does this mean to you.
If you have a 5% loan, your monthly payment per thousand dollars will be $5.37 per thousand, at 6% it would be $6.00 and at 7% it would be $6.65. As an example, if you take out a $200,000 mortgage, your monthly payment would be $1074, $1200 or $1330. A loan at 6% will cost you 11.73% more than a loan at 5% and a loan at 7% would cost you 23.84% more than a loan at 5%.
Or to put it another way, you may not be able to buy as expensive a home because while you might qualify for a $200,000 home at 5%, you might only qualify for a $176,540 home at 6% or a $152,320 home at 7%. And while we have been very spoiled by extraordinary low mortgage rates for the past few years, it is astounding how affordability declines as mortgage rates go up.
So if you are thinking about buying a home in today's Charleston real estate market, pay close attention to mortgage rates because as Dan said, they tend to rise much faster than they fall.
For a longer term view of mortgage rates, the following chart is based on Freddie Mac 30 year fixed rates annually since 1972. As you can see, during periods of high inflation, mortgage rates were correspondingly high. Look at the early 80's, YIKES!
