Rising mortgage interest rates: A make or break moment for homebuyers?
A 'For Sale' sign is posted in front of a house in Hollywood, Fla.
Housing is back in the headlines this week. As you know from the show, the market has been on fire the last six months and almost all the news this week has been positive.
- New home sales up
- Existing home sales up
- Pending sales up
- Mortgage rates way up
Oh, wait. That last one's not so good. People hoping to buy a new home are going to have more in interest than they would have anytime in the last year. There's a question as to whether or not that pretty-much-overnight rate jump could scare people off buying. Ilyce Glink is here with some answers. She's a personal finance journalist and syndicated columnist writing about all things real estate.
So what's going on with mortgage rates?
"First of all, they're down [over time]. Let's have a little historic perspective. My first house, when I bought it, I paid 11.75 percent interest rate. That makes me sound really old and really out of touch. I will say that it's up a little bit because people are trying to decide in the bond market what the Fed is going to do. And right now the Federal Reserve has been buying to the tune of about $85 billion a month all kinds of mortgage-backed securities and that has been depressing the rate that you pay for your interest and that everybody else is paying as well. So banks are paying less, businesses are paying less, and homebuyers are paying less," says Glink.
Why are these numbers going up?
"They're going up because there's some talk that the Fed might be ending QE3, quantitative easing No. 3, and they may be ending it soon. Everybody knows that when the Fed stops depressing these prices that we are going to see interest rates go up. The question is do they go up where they were in 1993, which was 6.5 percent. Or do they go back up to where they were for the last five years, which was about 5 percent," says Glink.
Need housing help? Check out these websites if you're thinking about buying a house:
- Home loan help for veterans
- FHA loan insurance
- Buying a fixer-upper with $203,000
- Buying a home for a buck
- The Home Affordable Modification Program
- In addition to HUD's mortgage insurance programs, there may be programs sponsored by your state or local government or other organizations: Local Homebuying Programs
Here are some other housing and real estate website resources:
- HUD.gov - The U.S. Department of Housing and Urban Development has a bunch of information on how to buy and keep your home
- Making Home Affordable - This government website offers tools to help you see if you're eligible for refinancing programs or a new loan modification
- ThinkGlink - Ilyce Glink's website has all kinds of advice on housing and real estate issues
- Mortgage Professor - Get help and insight into the world of mortgages and home loans
- Trulia, Zillow, Redfin and Realtor are websites where you can find home sales information and data
The jump in interest rates is causing Ben from Minneapolis pause. He currently owns a small house and has signed a purchase agreement for a brand new home. At the beginning of this month, when interest rates were low, he asked his lender to lock in an interest rate for his loan at around 3.6 percent. Last week, he was quoted an estimate at 3.875 percent. Since then, the rate has risen to 4.2 percent. He's understandably freaked out. What should he do?
"There are some signposts that the lay-expert can look at to think about where mortgage interest rates are going. I would say, overall I wouldn't think about that mortgage interest rates are going to skyrocket," says Glink. "In fact, if you think about a signpost, the Fed has said over and over again that they're not going to stop the QE3, quantitative easing, buying, until we see the jobless rate, unemployment rate, fall below 6.5 percent. Right now it's about 7.5 percent and it's higher in a lot of other areas. They're going to keep putting pressure to keep interest rates super low. It is going to ignite the economy at some point in time. But for mortgage interest rates, what you're experiencing is sort of this bumpy bottom where they're going to bump up based on local news and the minute that it seems like the economy is not doing well, they're going to fall down again. You're still so far out from buying that house, from closing on it I think you can give it another couple of months and when you see one of these dips, that's when you lock in."
Glink says the last three weeks we've seen rates rise up from a historic, all-time low bottom. They're now up about half a percent. In another six months, Glink doesn't think we'll see them up any higher. But, she says, if interest rates rising a few percentage points matter that much to your budget, you should think about whether or not you're buying "too much house."
Glink says the path to homeownership has changed over time. She says it's much harder to buy a house today than it was 10 years ago.
"I'm not being nuts when I say that basically if you had a pulse and a good credit score, you could qualify for 10 times your incomes 10 years ago. That's where we were back in 2003 and 2004," says Glink. "Today you actually need a pulse and a credit score and you have to have work and they have to look at your tax returns. There are a lot of hoops that you have to jump through that do make it harder for people who are on the edge to qualify. The vast majority of Americans are fine. But credit score is important and your work history is important. If you're self-employed it actually is going to be tougher to qualify. There's a box that lenders have created and if you fit inside the box, you can seriously get qualified in a couple of minutes on the phone. But if you don't fit into the box -- if you've made an investment in a neighbor's business and it looks like there might be a $100 loss, huge red flags are going to go up and you might not get your loan."
Robert from Tustin, Calif., has experienced how times have changed in real estate. He just closed on a condominium that he purchased with his mother. Fortunately, his records were all digitized. But he was stressed out trying to track down records for his mother to prove her credit worthiness to the bank.
"It was so easy to get a loan back10 years ago. But now every little single thing about [my mother's] life has to have a record. They have to have explanations," says Robert. "It seems a little bit more difficult than it used to be."
Glink says Robert's experience is typical -- and having to prove credit worthiness can be an exhausting process.
"That's the difference, [credit worthiness] used to be assumed. Today it's not. Proving every single little thing can be very exhausting for people even if they're not in their 60s and 70s," says Glink. "It's mentally taxing."
But Glink says Robert can use the condominium purchasing as an opportunity to help his mother digitize her records and prepare her finances as she moves into or further into her retirement.