Rising Rates Bite Borrowers’ Budgets

By Steve Matthews

Tuesday, May 1st, 2018

A recent uptick in mortgage interest rates is increasing costs for buyers already grappling with rising prices.

The average monthly mortgage payment is up nearly 13% nationally over the past year, according to an analysis released by Realtor.com last month. That’s an increase of $168 per month, according to the analysis.

Mortgage interest rates are about a half-percentage point higher than they were at the beginning of the year. According to the Mortgage Bankers Association, the average rate on a 30-year, fixed-rate conforming mortgage ($453,100 or less) was 4.69% in the week ending March 23.

With Federal Reserve officials signaling last month that they want to cool economic growth, the pace of rate increases may pick up. An increase of a quarter of a percentage point on a $300,000.00 30-year, fixed-rate loan would increase the payment by $45 a month, assuming a starting interest rate of 4.625%.

Rising rates are affecting mortgage originations, at least for refinances. According to industry research group Inside Mortgage Finance, originations for refinances were down 35.6% by dollar volume in 2017 compared with 2016. The volume of purchase originations, however, increased 10.7% during the same period.

Sensitivity to mortgage-rate fluctuations could also vary by generation.  Millennials came of age when interest rates were at historic lows, so even a minor upswing may seem significant. But older borrowers may recall the days when rates reached double digits—as high as 18.45% in October 1981, according to Freddie Mac—so they may perceive rates as low even if they rise by a percentage point or two.

Here are some things to consider if you’re thinking of refinancing or purchasing a home:

• Refinance sooner rather than later. Rates are forecast to increase through at least the end of the year, so there’s no time like the present. If you’ve been considering refinancing, look into it now. If you have an adjustable-rate mortgage that’s about to reset in a year or two, it might make sense to lock into a fixed-rate mortgage.

• It’s time to reconsider ARMs. Most borrowers have eschewed adjustable-rate mortgages over the past year because rates on fixed-rate loans have been so low. But it’s time to reconsider a 5/1 or 7/1 ARM, where the initial rate is fixed for five or seven years, particularly if you plan to only be in your home for a limited period of time.

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