Excerpted from May 26 Washington Post: Rates on 30-year mortgages jumped to their highest level in seven months as prospects diminished for Federal Reserve rate cuts any time soon, reflecting concerns in financial markets that inflation worries will keep the Fed from cutting rates in coming months.
Frank Nothaft, Chief Economist at Freddie Mac, said he was looking for a gradual rise in mortgage rates the rest of the year…and looked for housing to stage a recovery beginning at the end of this year, with a modest increase in both sales and home construction in 2008.
30 year fixed rates now average 6.37% nationwide. Let’s keep this in perspective though. Take a look at the long term average rates:
Source: Long & Foster
Information deemed reliable but not guaranteed.
So, in the big picture, rates are still extraordinarily low. Let’s use a real life example: take a $500,000 loan (more than the average condo in Arlington, but we’ll use it because it’s a nice round number). A borrower with a 30 year fixed rate loan of 6.35% has a Principal & Interest (P&I) payment of $3,111/month. Let’s say rates continue to go up–at 6.45% that same loan has a P&I of $3,144, a difference of $33. Of course $33/month adds up over time, but if that $33 is make-or-break in your budget, then you should NOT be buying a house in that price range anyway. If rates go all the way to 7%, then we’re talking $215/month, so that gets to be a bit more significant in the monthly budgeting process. I guess what I’m saying is to not panic when you read rates are slowly going up…a small tick in prices should not impact your go/no-go decision in a home purchase, and if it does, then you need to be looking in a lower price range.
Several weeks ago I posted about Fannie Mae and Freddie Mac programs to help borrowers who are in risk of defaulting, or have already defaulted, on their sub-prime loans. By now, everyone has read of the “melt down” fueled by 2/28 and 3/27 adjustable rate loans that offered very low teaser rates back i n 2004-2005, and are due to begin resetting this year. The issue is that lenders approved borrowers based on those low initial payments and now that the payment will be going up–often very dramatically–borrowers who either didn’t understand the resets, or just aren’t good at budgeting, are in serious trouble.
Now Congress may be stepping in as well, in the form of a “stealth bailout” via the FHA. The Federal Housing Authority has many loan programs aimed at helping first time buyers, but the loans came with some serious drawbacks: heightened inspection requirements, mortgage insurance, and most importantly in this area, a relatively low maximum borrowing cap. With prices so high in this area, FHA loans just weren’t a good deal for most borrowers. Congress is currently considering an FHA overhaul package that would, among other things, raise the cap, and lower the down payment requirement, all while providing 30 year fixed rates that are about 3% below the going sub-prime rate. Obviously FHA is expecting to see a surge in applications. Of course there will be snags as this bill makes it through the convoluted process, but if it comes through relatively intact, this could be the “middle” of the end of the “meltdown.”