Mortgage rates up

We’ve ridden the absurdly low interest rates train for more than seven years now; is that money-saving journey coming to an end? Not sure you noticed, but from January to June, 30-year fixed mortgage rates actually crept up from 3.7% to 4.2%; they are now hovering around 4%. Image provided by Yuqin Pan.

According to our chief economist, Jonathan Smoke, a 6% interest rate is “normal.” But Smoke doesn’t see us hitting that in the next two years: “We will likely see less than a 100 basis point increase over the next two years, which would bring us to around 5.5% in 2017.” Still below normal! If that increase does in fact happen, it would translate into a 12% increase in monthly payments over current rates. This affects mortgage shoppers, of course, and also those holding adjustable-rate mortgages.

As Smoke pointed out in a recent column, there are plenty of ways to mitigate and manage the direct impact of the current rate increases. You could pay an upfront discount point, consider different mortgage types, and ask for rate lock-ins and float-downs. .

Because predictions are just that—predictions—when should you worry? If you see mortgage rates make a “fast and big” jump. How fast and big? More than 100 basis points over a 12-month period. That would be a point at which the rent vs. buy calculation starts to be more relevant. Right now, in 80% of U.S. markets, it’s better to buy than to rent.

There is a plus to mortgage rates going up at their current pace: With more revenue to be made on purchase mortgages, and less demand for refinancings, lenders will likely become more aggressive. That should ease restriction on credit, because as many know from personal experience, getting approval for a mortgage has gotten much tougher.

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