Who should you have sell your house?
Mortgage rates hit a four-year high late last week, and it’s looking like the years of ultra-low-cost home loans are coming to an end, experts said.
“I would say this has been a long time coming,” said Dan Starelli, head of Guild Mortgage in Sacramento. “We’ve had interest rates dropping for decades. I think we hit bottom. I don’t think we’ll see rates in the 3s again.”
Interest rates for 30-year fixed-rate mortgages now hover in the 4.5 percent range after a run-up over the past month that was prompted by stock market volatility and strong signs of economic growth.
Last year average rates for 30-year mortgages were as low as 3.78 percent, and the year before that they fell nearly to 3.4 percent, according to Freddie Mac, the huge home-loan corporation owned by the federal government.
Freddie Mac’s average rate for 30-year mortgages on Thursday was 4.38 percent, its highest level since April 2014, but many banks were charging more. Wells Fargo and Umpqua Bank, for instance, both posted 30-year mortgage rates of 4.5 percent on Friday.
A number of factors are influencing the rise. The stock market took a huge plunge earlier this month, with the Dow Jones Industrial Average experiencing its biggest one-day drop in history. The sell-off was prompted in large part by fear of rising interest rates and indicators of strong economic growth, including low unemployment, that can lead to inflation.
The Federal Reserve, the nation’s central bank, has kept rates low for years to spur economic growth but will likely raise the cost of borrowing going forward, economists said.
“Inflation measures were broad-based, cementing expectations that the Federal Reserve will go forward with monetary tightening later this year,” Len Kiefer, deputy chief economist with Freddie Mac, said in a prepared statement on Thursday.
Increasing the interest that the Fed charges banks can push up rates across the board, including car loans, credit card rates and mortgages.
In addition, the yield on 10-year Treasury notes – a number that usually correlates with mortgage rates – has surged in recent weeks. The yield goes up as demand for the securities, deemed among the safest in the world, goes down.
During the recession and its aftermath, the Federal Reserve, nervous investors and overseas entities bought 10-year treasuries in huge quantities, driving down the yield and pushing mortgage rates to historic lows. That’s no longer happening.
“It was very artificial,” Starelli said. “Now we’re getting into a more realistic market, which is healthy overall.”
He and other mortgage professionals said they expect interest rates to continue to rise this year, perhaps reaching 5 percent by year’s end. But they don’t expect a return to traditionally more normal rates of 7 or 8 percent anytime soon.
While the overall economic picture may be good, the increased cost of mortgages isn’t good news for would-be homebuyers. That’s especially true for those competing for entry level homes, which in the Sacramento market are considered those priced at less than $350,000.
“It is a tremendous challenge right now for low-to-moderate income families to get into housing,” said Kara Thomson, homeownership manager with nonprofit housing group NeighborWorks Sacramento.
Every dollar can count when trying to make a home loan pencil out, she said.
A family of four earning 80 percent of the area median income, or just over $60,000, can afford a mortgage of less than $270,000 and a monthly payment of about $1,800 a month, she said. Increasing that payment by $100, because mortgage rates have gone up by half a percentage point, can affect a family’s ability to qualify for a mortgage.
“A hundred dollars can make a difference,” she said. “Sometimes they’re right on the line anyway.”
Brandon Haefele, president of Catalyst Mortgage in Sacramento, agreed that even a seemingly incremental rate increase “can be a big deal for an average homebuyer.”
“You’re talking an increase over 30 years of $18,000 to $20,000 of interest that you’ll pay,” he said. That assumes a $350,000 mortgage with 10 percent down, which is fairly typical these days.
Entry level buyers are already at a disadvantage when competing for an extremely low inventory of homes for sale and need to put themselves in the best position to get an offer accepted, he said.
Haefele’s advice: “Be pre-approved. Know your purchasing power. Ask your loan officer, ‘What if rates go up a quarter point or half a percent? How will that affect my purchasing power?’ ”
Just in case rates should fall again, make sure your lender has a float-down policy allowing a locked-in rate to go even lower, he said.
You never know, Haefele said. “Rates might pull back and improve a little bit.”