So the inevitable happened. Mortgage rates ticked up from their record lows, and the popular 30-year fixed has now drifted above four percent. Gasp!
Does this mean we should stock up on water, dry goods and ammo, and crawl into our respective bomb shelters?
Not exactly. While mortgage rates aren’t as low as they once were, they’re still at rock-bottom levels.
This week, troubled mortgage financier Freddie Mac said the 30-year fixed averaged 4.08%, up from 3.92% a week earlier.
While that may be a sizable jump, it’s only slightly higher than the all-time low, which was 3.87%, seen just about a month ago.
However, it’s the first time mortgage rates on the popular 30-year fixed have averaged higher than 4% since October 2011.
Freddie Mac chief economist Frank Nothaft attributed it to mortgage rates “catching up with increases in U.S. Treasury bond yields.” In other words, the economy is showing signs of life.
Mortgage Rates Are Still Ridiculously Low
However, mortgage rates are still a major bargain, even if they continue to tick up a bit higher.
Sure, it’s annoying that mortgage rates are nearly a quarter of a percentage point higher than they were last week, but it’s certainly not the end of the world.
For most looking to refinance their mortgage, it shouldn’t sway their decision.
If mortgage rates continue to rise at the latest week-to-week pace, some may have to think twice. But that’s pretty unlikely.
Still, we’ll probably see a cooling in refinance applications in the near term, though only relative to the heightened volume seen as a result of the ultra low rates.
Higher Mortgage Rates Shouldn’t Change a Home Buying Decision
As for those looking to purchase a home, you shouldn’t be discouraged by the uptick in mortgage rates.
Yeah, your estimated monthly mortgage payment may have risen some, but not enough to make or break your decision.
Let’s look at an example:
Loan amount: $250,000
Old mortgage rate: 3.875%
New mortgage rate: 4.125%
Difference in monthly payment: $36.03
In this scenario, your monthly mortgage payment would rise from $1,175.59 to $1,211.62. That’s a difference of roughly $36.
I can’t think of a time when $36 made or broke a major financial decision…
Of course, if you pay down your loan over the full mortgage term, the difference in interest paid will be about $13,000. So it’s not insignificant in that respect.
But that’s a big “if” these days. Most people sell, refinance, or prepay in only a matter of years.
Higher Mortgage Rates May Signal Economic Improvement
Anyways, the higher mortgage rates won’t necessarily derail an economic recovery, even though housing is a major component.
In fact, the higher mortgage rates are actually a reflection of the economy improving.
And don’t expect home prices to fall because mortgage rates rise. There’s actually very little correlation between homes prices and mortgage rates.
People tend to think that higher mortgage rates will cool demand, but history hasn’t proven this.
So don’t fret.