Rising rates are a
worry: 30-year fixed rate mortgages have gone from 3.5 percent to about 4.5
percent in the past month. That's not great, but concerns that the housing
recovery may be choked off by this is a bit premature.
Here's why:
First, the rise in
rates is unlikely to deter most buyers. Let's take a couple buying a $375,000
house...they put down 20 percent ($75,000) and get a mortgage for the remaining
$300,000.
There's no question
they are paying more for the mortgage now.
$300,000 Monthly
Mortgage Payments:
·
At 4.5%: $1,520
·
At 3.5%: $1,347
The difference is
about $180 a month, or $2,100 more a year. That's not chicken feed, but it may
not be a deterrent for most people.
First off, it's
deductible. Assuming a 25 percent tax bracket, that $2,100 will only be $1,675.
Second, to qualify for that $300,000 loan the couple is likely to have to make
about $75,000 a year. $1,675 is 2.2 percent of $75,000. That is not insignificant,
but I don't think it will deter a large number of people. If it does, they can
buy a slightly less expensive house.
And remember: this
assumes no price appreciation. If that home appreciates even two percent a
year, that is $7,500 a year.
Second, there are
other mortgage programs at lower rates than a 30-year mortgage. I just got off
the phone with a friend of mine who is mortgage broker in Philadelphia. He
described several products with rates lower than 4.5 percent for that 30-year
mortgage.
Example: a 15-30
balloon program, which is fixed for the first 15 years at a 30-year
amortization rate and then becomes a balloon payment at the end of 15 years. In
a balloon payment, the entire outstanding balance becomes due; the investor
usually just gets a new mortgage. But most home owners don't stay in their home
15 years: the average home owners stays about 8 years. The current rate: 3.5
percent.
There are other
programs, like a 10-1 Adjustable Rate Mortgage (ARM). Here, you get a fixed
rate mortgage for the first 10 years, which then converts to an ARM that
adjusts each year. Current rate: 4.125 percent.
My point: there are
plenty of alternative products out there to keep rates lower, if that is what
is needed.