Since the presidential election, mortgage rates have risen from 3.5 percent to about 4.2 percent, increasing the borrowing costs of would-be home buyers.
The rates are rising on the expectations of greater business activity and a stronger economy. But the good economic prospects may come at a price to home buyers.
Nevertheless, make sure your clients keep perspective. In the 1970s, the average 30-year fixed-rate mortgage was 8.9 percent; in the 1980s, it was 12.7 percent; in the 1990s, it was 8.1 percent. The first decade in 2000s, rates averaged 6.3 percent. Suddenly, that 4.2 percent interest rate may not look so bad in a historical context, eh?
“Nonetheless, many consumers with a short-term memory, especially among the young, have often witnessed sub-4 percent rates and the latest rising rates feel financially discomforting and discouraging,” notes Lawrence Yun, the chief economist for the National Association of REALTORS®, in his latest column for Forbes.com.
Yun cites the following example: Take a typical home priced at $235,000. The mortgage borrowing amount is $200,000. A monthly payment would be around $898 at a 3.5 percent mortgage rate. As rates rise to 4.2 percent, that monthly payment jumps to $978. At 5 percent, the monthly payments would rise to $1,074. And if rates were ever to return to those levels from the 1980s, payments would surge to $2,166.
Yun and other economists aren’t predicting any such rate jumps like those of the past, however. Yun predicts mortgage rates to average 4.5 percent to 4.8 percent by the end of the year, and 5.5 percent by the end of 2018.
“Rising rates are no doubt pinching the family budget of would-be home buyers,” Yun says. “However, as long as the rate rises are gradual such that salaries have time to rise more strongly to mitigate some of the sting of higher mortgage payment, consumers should view these as still historically attractive mortgage rates.”
Source: “Stressed Over Higher Interest Rates?” Forbes.com (Jan. 5, 2017)
