Sound the alarm! Mortgage rates have crossed an important psychological threshold.
Is it time to freak out and just buy a home, no matter whether you actually like it or not? Is the refinancing bonanza really done this time?
The former, probably not such a good idea. The latter, well, it could put a major dent in refinance applications, though a late surge is also possible as fence sitters finally apply.
Fear of Missing Out
I already wrote about the fear of missing out (FOMO) a while back. It’s kind of like YOLO, except in this case we’re talking about making what appear to be smart financial decisions for your future.
As mortgage rates rise, there will be more pressure on would-be home buyers to finally pull the trigger, assuming that was partially their motivation.
After all, with rates always at risk of rising, but never actually climbing over the past couple years, there was little impetus to refinance or buy a home without delay.
But if everyone believes that this is finally it, the end of low rates forever, we could actually see a surge of business as the FOMO crew finally steps up to the plate.
That should be good for the mortgage industry, at least in the interim, but it could lead to another round of layoffs and rightsizing once the mini-boom fades.
The FOMO factor might have revealed itself in the latest mortgage application numbers from the MBA, which snapped six straight weeks of declines.
Are consumers entering panic mode now that rates really do seem to be trending meaningfully higher? There’s no guarantee, as we’ve seen this type of thing before, but it’s certainly something to keep an eye on.
If you’re wondering why rates shot up so much so fast, it’s for a variety of reasons. You can blame the Fed’s plan to raise rates soon, or the better-than-expected jobs report, or the global sell off in bonds, or the hope of a Greek bailout.
Basically everything is working against mortgage rates at the moment, which explains how they surged to 2015 highs in a matter of days.
Is It That Bad? It Depends
While it might appear that the sky is falling (because rates are rising), it’s not as bad as you may think.
Sure, the 30-year fixed climbed to 4.04% this week from 3.87% last week, and is now well above the 2015 low of 3.59% seen back in early February.
But that’s only a half-point increase, which for most mortgages isn’t necessarily a deal breaker, or enough for most homeowners to notice.
A couple years back I made some mortgage payment charts with Microsoft Excel that compared monthly payments across different interest rates.
For a $200,000 mortgage, a rate of 3.5% is $898.09, and only rises to $954.83 at 4%. Yes, it’s $56.74 higher each month, but if that’s enough to make you reconsider homeownership, you might want to pump the brakes.
You should have plenty of room to take on a larger monthly mortgage payment or perhaps renting is a better idea.
Those with larger mortgage amounts will be hit harder, but you could say it’s all relative.
In any case, you shouldn’t have to turn to an adjustable-rate mortgage just yet, but don’t be surprised if banks start pushing them more aggressively to enable affordability, especially if rates keep rising.