Charting interest rates' next move
By Dian Hymer
On May 26, 2009, shock waves hit the mortgage market as interest rates shot up after dipping into the 4 percent range for 30-year fixed-rate conforming loans. On May 29, the bond market rallied, lowering mortgage rates by about half of the previous days' increase.
This was followed by another rate hike as investors demanded higher interest rates on long-term government debt. Interest rates on 30-year fixed-rate home mortgages are tied to the 10-year Treasury rate.
In mid-May, the interest rate on a 30-years fixed conforming loan for loan amounts up to $417,000 was available at 4.38 percent and one point. The one-point origination fee is equal to 1 percent of the loan amount. On May 28, the rate for this type mortgage shot up as high as 5.25 percent with one point, topping 5 percent for the first time since March 2009.
Recent news suggesting that the economy might be strengthening put upward pressure on interest rates. However, the economic recovery is not expected to happen quickly. In the meantime, expect continued volatility in the mortgage market.
HOUSE HUNTING TIP: Most buyers who locked in an interest rate before May 28 did not suffer any negative impact from the rate increase. Their loans closed at the interest rate quoted to them when their rate was locked. It's advisable in this market to lock in a rate as soon as possible. Lenders won't allow you to lock a rate until you are in contract to buy a home.
Some buyers are reluctant to lock in a rate, hoping that interest rates will decline before they close. Many lenders offer a one-time-only float-down. A float-down reduces your interest rate to the then-market rate.
So, if you were to lock in a rate at 5.13 percent and rates dropped to 4.75 percent, you could exercise your float-down option and take the lower rate. You would be charged a redraw fee if your loan documents had already been prepared at the higher rate.
Normally, a rate lock is good for 30 days. Given the backlog in processing mortgages, it's not uncommon to see closings delayed. Some lenders take 30 days to approve a mortgage. Then the buyer's loan documents need to be drawn and signed by the buyer before the lender will fund the loan. Some lenders will automatically extend the rate lock if loan processing is delayed.
In today's market, it's hard to close a sale in 30 days. Forty-five-day closings are more common. It's possible to lock in a rate for longer than 30 days, but it will cost more, typically an extra one-quarter point for a 45-day lock.
Some economists think rates will stay around the current level through summer, and then start creeping up if the economy shows clear signs of recovery. Higher interest rates decrease homebuyers' affordability. If the housing market hasn't improved by the time interest rates rise, this could put a damper on the home-sale market and on home prices.
Find an astute mortgage professional to work with, one who is in tune with the vacillations of the bond market and who can advise you when to lock a rate. Ask how much you can afford if interest rates jump 0.5 to 0.75 percent. Broaden your price range to include less expensive homes if you find that a rate increase will significantly affect what you can afford to pay.
THE CLOSING: Unless you get lucky, you won't pay the rock-bottom price for a home, nor will you get the best rate of the century. The goal is to find a home that suits your long-term needs at a price you can afford.
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