Is the era of low home loan rates officially over?
That might be an overstatement. Though mortgage finance company Freddie Mac reports that 30-year fixed mortgage interest rates recently rose for six straight weeks, at 3.98 percent current home mortgage rates are still among the lowest on record. After all, it wasn’t until 2011 that 30-year mortgage rates dropped below 4 percent for the first time.
Still, mortgage rates look like they’ve started to make a sustained upward push, and if the economy keeps growing, that push could continue. If it does, the most obvious impact is that buying a house will get a little more expensive for borrowers. Beyond that, though, the ripple effect of rising rates could well include the following:
- The rally in housing prices could start to slow. According to the S&P/Case-Shiller Home Price Indices, residential real estate prices across a wide variety of US metropolitan areas rose by more than 10 percent between the end of the first quarter of 2012 and that of 2013. Expect a rise in mortgage rates to take the edge off of this rally. As home buyers have to put more of their monthly payments towards mortgage interest, it will reduce what they can afford to borrow and pay for a house, making it more difficult for home prices to continue to rise rapidly.
- Differences in mortgage quotes may increase. Getting competing mortgage quotes is always important when shopping for a home loan, but if rates start to change rapidly, this comparison shopping could become even more important. Lenders react at different times and to different degrees when rates change direction, so you might start to see larger differences in mortgage quotes from one lender to the next.
- Yield spreads for different loan lengths could widen. When rates start to rise, longer-term mortgage rates are likely to react most strongly, because the length of the loan represents the amount of risk that lenders face if they are out of step with the interest rate trend. The first weeks of the recent rally in rates saw 30-year fixed mortgage rates rise by a greater amount than 15-year rates rose, and in turn those 15-year rates rose by more than ARM rates. These changes have widened the spreads between rates for different loan categories. If these spreads continue to increase, it could influence your thinking about what length of mortgage to get, or even what type.
- Refinancing volume may taper off. Recently, the Mortgage Bankers Association reported that refinancing represented 68 percent of all mortgage application activity. Believe it or not, that dominant share was actually the lowest since July of 2011, as rising rates have already started to cut refinancing volume. Expect that cooling trend to accelerate if rates continue to rise.
- Mortgage standards may ease. Who says rising mortgage rates are all bad for borrowers? In recent years, the "catch" of low interest rates was the fact that only people with excellent credit records were able to qualify for loans. As rates rise, you might see lenders loosen up their underwriting standards a little bit. For one thing, lending money at 3.5 percent left lenders very little room for error. At higher rates, lenders may feel they have more tolerance for delinquencies and defaults. Also, when refinancing activity was at a fever pitch, lenders could keep themselves busy with top-drawer loans and didn't need to bother with less-than-perfect applicants. As noted above though, refinancing activity will get slower and slower as interest rates rise, which may induce lenders to pursue riskier business more aggressively.
Each of these changing mortgage conditions can affect different borrowers in different ways. Having an idea what to expect as rates rise can help you decide what mortgage choices to make, and when to make them.