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Interest Rates are Rising

By Kerry ONeal

As Rick Blaine says, “Maybe not today, maybe not tomorrow, but soon and for the rest of your life.” We all know that interest rates cannot stay as low as they have over the last several years. But, honestly, I’ve almost worn myself out predicting the rise.

For the last three years, we’ve agreed with industry experts that we would likely see a 1% rise in interest rates over the following 12 months. Each of those predictions was based on solid evidence, historic precedent, and prudent thinking. However, the market has continued to enjoy this very incredible period of ridiculously low interest rates.

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A one-percent rise in interest rates doesn’t sound like a whole lot. And in reality, it’s not. Especially when you compare it to where interest rates have been historically. For many of our parents, and grandparents, the fear of a 5.5% mortgage rate would seem absolutely absurd. Most of that group have memories of purchasing real estate with mortgage rates in excess of 15%.

So, does a small rise really matter?

It could. Especially in markets where buyers are finding it difficult to afford what they need, and that’s why it matters to Bend and Central Oregon. A 1-point rise in a 4% interest rate is still only one percent in additional interest rate. But, it is also true that it represents a 25% increase in the interest payment on the mortgage. And 25% is significant, perhaps even critical, in markets where affordability is already a struggle.

November2015-28 copyTo a family or individual that is struggling to purchase their first home in Bend, Oregon, that one percent rise has significant effects on their price range. Mortgage availability has come back around, to a large extend, which means our hypothetical buyer will likely be able to find low-downpayment financing options. Of course, those options are completely dependent on the buyer’s income qualifying for the loan payment. And, because first-time buyers are taking advantage of low-down payments, the interest they’re being charged on their mortgage debt causes a large swing in the home they can afford.

In and around the City of Bend, as I write this, there are roughly 611 single-family homes for sale. Of that list, only about 15 of them are under $250,000. If you’re a homebuyer qualifying for a FHA loan with 3.5% downpayment, a 4% mortgage rate on your $250,000 purchase would make your principle and interest payment about $1150.

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Now raise the interest rate to 5%. If your income demands that your payment stay in that $1150 range, your purchase power just dropped to about $222,000. Want to know what that does to your selection? You now get to choose between two homes. One that is being advertised for auction, and a 748 sf home on .07 acres that is advertised as needing some “TLC”.

The bottom line?

If you’re going to need to buy a home next year, you might want to buy it this year. If you plan on living in the home for a long period of time, the cost of waiting could be even more dire. And if you know of a first-time homebuyer that is talking about purchasing next year, please tell them not to wait. We’ve seen too many people being priced out of the market by appreciation, and the compounding effects of rising mortgage interest rates will accelerate the process.

Filed Under: Blog Posts Tagged With: Buyers, mortgage

What you don’t know about today’s mortgages…

By Kerry ONeal

Sometimes the past is hard to forget. The real estate market in this county has been through some incredible highs and lows over the last 10 years and it has been difficult for even some professionals to wrap their head around. For most people, a home purchase is the single largest investment they’ll even make, and making a mistake with that investment has repercussions far into the future. There are a large number of folks in the Central Oregon market that were party to a short sale or foreclosure over the last several years. And even for those that kept their homes, the tough times we went through meant that their credit scores may have suffered. One of the biggest misconceptions about the current mortgage market is that it is difficult to get a loan.

As the graph shows, the availaNovember2014-10bility of mortgage credit is much higher than in the recent past and it continues to increase. Banks are in the business of loaning money, and as the economy continues to improve they are rapidly focusing on making mortgage loans in this market.

Both Freddie Mac and Fannie Mae are working to update their loan guidelines to make more money available for mortgage loans in the secondary market. They are also expanding the kinds of loans that can be made.

At the last Mortgage Bankers Association conference just last month, Mel Watt, the director of the FHFA, which oversees Fannie Mae and Freddie Mac, said this:

“To increase access to creditworthy but lower-wealth borrowers, FHFA is also working with the enterprises (Fannie Mae and Freddie Mac) to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.”

The important thing to remember is at the same time as more mortgages are available, many experts are expectNovember2014-11ing mortgage rates to continue to increase.  Many people look at increasing mortgage rates as just an added expense. What they don’t often think about is that mortgage rate has an incredible impact on the final price of the house you can afford. This is why we are encouraging many of our clients to make their next move now. If you’re thinking about cashing in on some of the equity you’ve made over the last few years, moving up, or going to stay put for several years in your next house, it makes sense to get it done now. Increasing interest rates can not only cost you more money, they can damper the market for selling your home.

Talking to a loan officer or mortgage broker is a painless process, but still few clients know how much they can afford before walkiNovember2014-12ng into our office. For a variety of reasons, we feel that finding a mortgage professional you trust is an important second step in any real estate move. Let us know that you would like a recommendation on a mortgage professional and we can provide you with some choices.

 

 

Filed Under: Blog Posts Tagged With: 2014, Buyers, mortgage

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