Hello clients, friends and website followers,
I would like to take a moment to clear up some misunderstandings about home mortgage rates. The biggest one is what happens when the FED increases rates. Everyone thinks that will make mortgage rates go up. Wrong! By the time the FED meets there has already been a perception of what they were going to do and the rates have already moved based on expectation. So if the FED does nothing worse than already factored in, rates will not change. They might actually improve a bit when the FED raises rates if comments are made by the FED implying that future rises are unlikely. Next, you always hear on ads for refinance that rates are at an all time low. Nothing could be further from the truth. Rates have climbed up steadily for over 2 years. The best indicator of rates is the adjustable rate Index called the 1 Year Libor, a London based Index. That index today is at 1.81 and 2 ½ years ago it was at 0.51. In the last month it went up a sharp 0.10. Adjustable rates can be based on various indexes such as 6 month or 1 year Libor. If it’s a 6 month than your adjustable rate is good for 6 months and then changes. If 1 year it changes every year. The bank adds a margin (profit) to the index and that is how your rate is figured out. So today a 1 Year Libor at 1.81 plus a margin of perhaps 2.75 equals an interest rate of 4.56 actually worse than a 30 year fixed rate.
Here is where you can find the 1 Year Libor: http://www.bankrate.com/rates/interest-rates/1-year-libor.aspx
6 month labor rates: http://www.bankrate.com/rates/interest-rates/6-month-libor.aspx
Here is a 20 year chart for various rates to look at
Where will rates go from here? The answer is simple. UP. I anticipate a minimum 2 point increase in mortgage rates over the next 2 years. So buyers beware if you will be getting a loan for your home. Rate is much more important than price and this is why, take a look:
On a $100,000 mortgage at today’s rate of 4.25% the payment is $492 a month
If rates go up to 52.5% that payment is now $552 which represents an increase of 12.2%
If rates go up to 6.25% the payment goes to $616 which is 25% higher than today’s rate.
Many buyers are waiting for prices to drop before they buy. Well it is true that prices of homes have gone up quite a bit and it would be nice to wait for them to come down say 10 or 15% right? WRONG!!! What matters is your monthly payment, not how much you pay for the house. Agree? You can wait for the price to drop 15% but if you wait and rates go up 2 points you will be much worse off with higher payments. Follow my example and adjust it for the value of your purchase and loan payment. In other words if you get a $300,000 loan multiply my example by 3. Etc…
So if you are buying, I say buy now. If you have an adjustable rate mortgage, I say get rid of it fast.
Contact us with any questions.
Ron Murray has been an agent for 27 years and has followed interest rates and the market carefully and has accurately predicted the direction of prices and interest rates. Economics and numbers are his passion ever since the University of Chicago Business school where he studied Economics with such illustrious professors as Milton Friedman and Art Laffer.