Rising rates are a worry: 30-year fixed rate mortgages have gone from 3.5 percent to about 4.5 percent in the past month. That's not great, but concerns that the housing recovery may be choked off by this is a bit premature.
Here's why: First, the rise in rates is unlikely to deter most buyers. Let's take a couple buying a $375,000 house...they put down 20 percent ($75,000) and get a mortgage for the remaining $300,000.
There's no question they are paying more for the mortgage now.
$300,000 Monthly Mortgage Payments:
- At 4.5%: $1,520
- At 3.5%: $1,347
The difference is about $180 a month, or $2,100 more a year. That's not chicken feed, but it may not be a deterrent for most people.
First off, it's deductible. Assuming a 25 percent tax bracket, that $2,100 will only be $1,675. Second, to qualify for that $300,000 loan the couple is likely to have to make about $75,000 a year. $1,675 is 2.2 percent of $75,000. That is not insignificant, but I don't think it will deter a large number of people. If it does, they can buy a slightly less expensive house. And remember: this assumes no price appreciation. If that home appreciates even two percent a year, that is $7,500 a year.
Second, there are other mortgage programs at lower rates than a 30-year mortgage. I just got off the phone with a friend of mine who is mortgage broker in Philadelphia. He described several products with rates lower than 4.5 percent for that 30-year mortgage.
Example: a 15-30 balloon program, which is fixed for the first 15 years at a 30-year amortization rate and then becomes a balloon payment at the end of 15 years. In a balloon payment, the entire outstanding balance becomes due; the investor usually just gets a new mortgage. But most home owners don't stay in their home 15 years: the average home owners stays about 8 years. The current rate: 3.5 percent.
There are other programs, like a 10-1 Adjustable Rate Mortgage (ARM). Here, you get a fixed rate mortgage for the first 10 years, which then converts to an ARM that adjusts each year. Current rate: 4.125 percent.
My point: there are plenty of alternative products out there to keep rates lower, if that is what is needed.