Don’t Freak Out About the Recent Mortgage Rate ‘Spike’

September 18, 2014 No Comments »
Don’t Freak Out About the Recent Mortgage Rate ‘Spike’

Queue the panic. Mortgage rates have officially spiked and the media is all over it. Yep, the average rate on a 30-year fixed mortgage increased from 4.05% to 4.19% this week, per Zillow’s weekly survey.

Over at Freddie Mac, the 30-year fixed climbed to 4.23% this week from 4.12% last week, the highest level since the very beginning of May. So should we all freak out?

I’m going to go with no. Zillow used the word “spike” in their press release, perhaps to make its relatively boring weekly report a little more interesting. After all, they release the same thing every week, so you’ve got to do something to jazz it up.

When it comes down to it, a 14-basis point move isn’t what I’d refer to as a “spike,” but yes, mortgage rates are higher than they were last week. And they’re higher than they’ve been since spring.

But only marginally higher, and not high enough to change anyone’s position on buying a home or refinancing their mortgage.

Sure, there’s a chance someone’s monthly mortgage payment now exceeds the max DTI allowed for the loan, but if you were cutting it that close, you’re probably buying too much home.

Should We Worry About the Fed?

More importantly, the Fed announced yesterday that it plans to end its mortgage purchase program (QE3) in October.

It also said it would add only $5 billion in agency mortgage-backed securities holdings next month, compared to $10 billion this month.

This could have a real impact on mortgage rates, seeing that someone will have to step up and make up for an absence of $5 billion in MBS purchases each month.

There’s already fear that no investors will be interested in acquiring securities backed by 30-year mortgages with rates as low as they are. After all, the return isn’t very good for the risk involved.

That could potentially cause mortgage rates to spike, though that too could all just be hot air. One could argue that mortgage rates should have already increased a lot more given the fact that we know the Fed’s next move.

But as long as they’re continuing to buy the mortgages this month and next, lenders will continue to make them at low, low rates.

Time will tell if rates will need to rise on long-term fixed mortgages as the Fed eventually exits the marketplace.

Will ARMs Spike in Popularity?

My guess is that fixed-rate mortgages will eventually jump as the Fed stops buying mortgages and raises the federal funds rate, and that could make for an exodus toward ARMs.

Just look at the non-QM market. All the lenders making non-QM loans, which generally stay on their books, are only offering loan programs like the five-year ARM.

I can’t recall seeing any of them willing to offer 30-year fixed loans, given the tremendous risk involved once rates begin to rise. So without the Fed around to buy these loans, perhaps there really is a mortgage crisis coming soon.

The ARM argument will get even stronger as borrowers contend with higher home prices, which makes affordability a concern as well. ARMs will just be a lot more affordable for borrowers, for better or worse.

The MBA reported that the ARM share of mortgage applications grew to 7.6% last week. I expect that number to hit double-digits as soon as next year, more out of necessity than preference.

You don’t need to panic, but you should be aware of the situation if you’re looking to buy or refi. It might also be a good time to consider how long you plan to stay in your home as well. That could dictate your mortgage decision.

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