With mortgage rates creeping up toward 5% as 2013 draws to a close, potential home buyers have some decisions to make — and soon.
A laundry list of economic issues, including inflation, consumer credit, and rising home prices has the U.S. housing market on the way to making a clean break from the days of the 3.50%, 30-year fixed-rate mortgage for the foreseeable future.
The danger for potential homebuyers isn’t that mortgage rates are nearing 5.00%; the real threat is that rates could go higher, to 5.50% or even 6.00% in 2014.
Think of it this way:
Buyer A snares a $300,000 fixed-rate, 30-year mortgage at a 5.00% interest rate, with the following payments:
• Monthly payment = $1,610.46
• Total payment = $579,569.69
• Total interest = $279,769.69
Buyer B grabs a $300,000 fixed-rate, 30-year mortgage, at a 6.00% interest rate, with the following payments:
• Monthly payment = $1,798.65
• Total payment = $647,515.44
• Total interest = $347,515.44
Buyer B will pay about $67,746 more for having a 6% mortgage rate, compared to a 5% rate, over the life of the loan.
Rates currently stand at 4.20%, according to Freddie Mac’s weekly mortgage rate survey.
While rates have been in decline the last few weeks, the big picture shows a general rise in rates to between 4.00% and 4.50% before the end of 2013. Which raises this question for potential homebuyers: Should you jump off the fence now, with rates still fairly reasonable, or do you wait and risk having to deal with mortgage rates as high as 5.00% or 6.00% in 6-to-12 months?
Here are some factors to consider:
Rates will likely rise — and soon: “Most people agree it is only a matter of time before rates hit 5%,” said Peter Grabel, a mortgage loan originator at Luxury Mortgage Corp. in Stamford, Conn. “The housing market has clearly turned the corner in most areas. I think a year from now people will look back and realize that this was a great buying opportunity.”
The Federal Reserve will stop “tapering”: For the last five years, the Fed has embraced a policy of low interest rates, primarily by buying up securities in the U.S. mortgage market. But all indications say the Fed will ease off on those purchases, thus driving interest rates up even further. “Rates in the 3% range are gone forever because the Fed will soon be pulling out of their mortgage backed securities purchasing program,” said Tim Lucas, editor-in-chief of the mortgage website MyMortgageInsider.com. “When the Fed stops buying, demand for these securities will fall dramatically, and rates will jump back up to typical levels. Once the unemployment rate nears 6.5%, the Fed could stop buying these securities, sending rates higher. We’re at 7.3% unemployment now, with positive economic signs at every turn.”
Home values are rising: The longer you wait to buy a home in this real estate market, the more expensive the purchase price will likely be. That’s because U.S. home prices are on an upward trend. CoreLogic, an Irvine-Calif.-based data analysis firm, estimates that U.S. home prices have risen 12.4% from August 2012 to August 2013.
The autumn buying season is underrated: Some mortgage professionals advocate buying now, not just because rates are reasonable but because there is less competition in the residential real estate market compared to the busier spring and summer buying season. ”Next to spring, fall can be the best season to buy a home, although this year the economic climate is different from recent years,” said J.D. Crowe, senior vice president at Georgia-based Southeast Mortgage. “During the past few years there has been a large inventory of homes. This year the reverse is true and we are experiencing a housing shortage. But fall is still a good time to buy a home, as you can take advantage of year-end tax breaks and the fall weather makes it an ideal time to move.”
Of course, the perfect time to buy a new home is when you are financially and emotionally ready for that obligation — likely the biggest financial investment of your life.
“Life events drive real-estate decisions — birth of baby, better school, death, divorce, parent moving in, illness, kids off to college, work relocation, unemployment, raise, bonus, hurricane — all the good planning on the buy side can wipe out the best of decisions when someone has to sell in a ‘bad’ market, said Diane Saatchi, a Long Island, N.Y., real estate broker. “Because of this, my advice to would-be buyers is to buy when they need and can afford to, as timing rarely makes a difference in personal real estate.”