As Mortgage Rates Rise, It Might Be A Good Time To Buy Your Dream Home
With interest rates near historic lows, the winter of 2021 is a great time to refinance your mortgage or make a move on a home you have always wanted. After making rate cuts in 2020, and with recent increases in mortgage rates, the Federal Reserve is still in an era of artificially low interest rates, for the time being. This is good news for buyers and anyone who is carrying a mortgage of any significance that is considering refinancing.
Interest rates have been kept artificially low almost continuously after coming out of the first shut down in March 2020. This has primarily been an effort by the Federal Reserve to prop up the economy on the domestic front along with maintaining liquidity in the system. But it seems like a bit of a paradox to have historically low interest rates when you have a strong growing real estate industry on a national level. We will not debate the pros and cons of the Federal funds rate, that is something for the economists. But there are side effects to keeping interest rates artificially low.
In a world where conservative investors seek yield, anyone with certificates of deposits or other fixed income securities has been hurt because they have seen a precipitous decline in their passive income stream. So, while homeowners and buyers have benefited from depressed interest rate levels, anyone depending on bonds, CDs or other types of fixed income instruments has taken a tremendous hit on their ability to spend and consume.
Mortgage rates rose last week at the fastest pace in over a year, causing new mortgage applications to slow to a growth rate of just .05% According to the Mortgage Bankers Association seasonally adjusted index. As of this writing, interest rates at the major banks for a 30-year fixed-rate conforming loan are around 3.23%, jumbo at 3.4% and interest rates for a 15-year fixed-rate conforming loan have been hovering in the range of 2.5%. The interest rate for any particular property and the costs associated with refinancing will depend on your credit score, down payment amount, property location, loan type/term and interest rate type and other factors that the lender deems to influence your ability to repay.
Even though mortgage interest rates have bounced around somewhat in the past year they are still awfully close to historical lows. We are certainly a far cry from the cycle in the 1980s when interest rates were 14% or even higher. At this point in time, interest rates are not a barrier to many people who wish to qualify for a mortgage. The rate hike means there is an expectation of stronger economic growth and higher inflation with a potential large stimulus coming and more and more businesses opening to full capacity. The bigger issue is saving until you have a large enough down payment to qualify for conventional financing.
Many homeowners got into trouble during the real estate boom in the last decade when they refinanced their properties and pulled out excess cash to use as spending money or to acquire additional properties. It is one thing to use the cash to do remodeling, build an addition or do other improvements that will raise the value of your property. But treating the equity in your home as an ATM and blowing the cash on an exotic vacation or some other discretionary expense will likely cause financial pain somewhere down the road.
It's a number crunching exercise to determine whether or not refinancing will have a positive economic benefit for your personal situation. If you are planning on staying in your property five years or longer, you'll normally benefit from refinancing if the interest rate you get is at least one-half percentage point lower than you are currently paying.
If you plan to move within the next 1 to 3 years, refinancing may or may not have positive financial benefits depending on your current interest rate, monthly payment and any costs associated with the new loan. These costs could include appraisal, document fees, origination fee, points and other expenses charged by the lending institution. It is critical that all of these fees be calculated as part of your cash flow expenditures over the next 1 to 3 years when determining whether or not refinancing makes sense for you.