Is now the time to Refinance your Home Loan?

With rising mortgage rates looming on the horizon, is now the
time to refinance to lower your payment, or take cash out for
improvements or investing? Call Western Realty Finance,
Dave Van Waldick, Carlsbad Ca. 92011. 760-599-1261.

Visit My Website Here for more Information

NMLS# 345616 / Ca BRE# 01065844

The Effect of Rising Interest Rates in 2015.

The drum beats of rising interest rates is everywhere...

It is widely assumed by financial market pundits and economists that interest rates will rise in 2015. Based on economic growth indicators and comments made by the Federal Reserve, they suggest the inevitable need to raise rates. The unknown is the timing. Many say as early as 1st quarter, some suggest it will be delayed as international markets in Europe and Asia have been slowing and this could transfer to a slowdown in US markets which could prompt the fed to hold back a few quarters.

Of course we need to identify what "increased interest rates" means to the current homeowner or potential buyer. At the start of interest rate yield curve, short term rates are more directly effected by the federal reserve actions in short order. For the past few years, the fed has tried to keep the shortest term rates or "Discount Rate" close to zero. With an expected increase of this target rate to 1% initially, that will have the effect of increasing rates further out the "yield/rate curve". While short and long term rates do not move in a 1:1 ratio, they do tend to move together over time. So, the rate that we care about at Housing Matters is of course the transfer to mortgage rates. Nationally mortgage rates have been hovering around 4% for conforming, conventional, owner occupied, 30 year fixed 1st mortgages. The scuttlebutt being discussed is that these rates would rise  about 1% as the year progresses and the fed continues along their anticipated trajectory towards 1% or higher depending on inflation and continued economic growth.

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Of course, keep in mind that there have been a few notable contrarians on interest rates rising even as many thought 2014 was the year to increase.  Since it looks like 2014 will end with rates a little lower than the start, it shows that even when there’s consensus, there is contention among experts.

Therefore, barring any major economic upheaval, yes, mortgage interest rates will be gradually climbing. Given that, let's discuss a few points that will effect current homeowners and buyers.

1. Mortgage rates will increase!

Interest rates can't stay bound at such low levels. Assuming the current median California loan size of $450,000, and that loan with a rate/payment at 4% of $1,912 vs. a rate/payment at 5% of 2,218 for a difference of $305/mo. Does not seem like a lot, but if we look at the increase in terms of the underwriting effect using a 43% industry standard total debt to income ratio that 1% rate increase now requires an income increase of approximately $8,500 additional yearly income. Assuming this to be roughly 7-10% of the median income of potential home buyers, this means effectively, that a 1% increase in income in Ca. has the effect of reducing the pool of homebuyers by as much as 10% of those eligible at 4% rates.  

Following this line of analysis as rates continue up, one can easily see where if the fed continues to increase rates over a period of 2-3 years as they have in the past, this will significantly effect homeowners and prevent a large portion of potential buyers from entering the housing market until rates come back down or incomes increase significantly. Historically, the only two factors that most significantly increased home ownership are falling rates or falling home prices. And so the 10 year housing cycle in Ca. goes. If you are considering refinancing to lower a rate, convert from FHA to conventional loan type, or buying a home, the near future seems to be the best time to contact your mortgage lender and begin the process or get prequalified to be ready. 



Go to www.1californiahomes.com and view homes for sale in Carlsbad Ca. 92009

 2. Housing prices could stagnate or come down!

As interest rates rise, affordabilitly naturally declines in the short run. Short of a re-make of the loose lending guidelines and creative financing that partially supported the recent housing crisis, the main effect of higher financing costs is a slowdown in home price increases or potentially a decrease in prices. As buyers get skittish about housing costs and rate increases, they are less willing to continue to pay higher and higher prices for homes. Since housing like most consumer markets tend to actualize consumer concerns over time, the likely outcome is a decrease in prices should interest rates increase 2% or higher. This always of course begs the question of timing. Since home buying is such a personal decision based on many factors, Housing Matters suggests contacting your local realtor and asking about market conditions, financing, and their insight into local housing trends.

3. The cost of home buying and obtaining a mortgage is rising, and spooks buyers!

Dave Van Waldick, a 25 year Mortgage and Real Estate broker in Carlsbad Ca. says the cost of buying and owning a home, and obtaining a mortgage has increase significantly in the past seen years. He mainly attributes this to the huge new costs associated with new national and state regulatory requirements. The massive amounts of administrative and punitive actions placed on mortgage lenders and support services by the current administration and aggressive state regulators has increased closing costs over $1,000 per closed escrow whether a purchase or refinance. Mr. Van Waldick adds, "in addition to these direct and visible costs to consumers, the behind the scenes raising of Government Fee increases in the form of Guarantee Fees by both FHA and FNMA, as well as smaller fees by state regulators and licensing agencies, has placed a large and hidden burden on lenders which pass them on to borrowers in the form of higher rates and fees."  

These hidden fees likely add .25 to .50 percent to the typical mortgage rate from 5 years ago. Mr. Van Waldick feels these fees to be a form of hidden taxes not agreed to by the consuming public, voters in general, or even the bulk of elected representatives most of which don't have a clue as to the actions going on to raise these fees and costs to their constituents.   

The upshot of these three points being that, as interest rates look to be going up, and prices continuing upwards in the short run, these enormous fee increases to boot, the cost of home ownership to new buyers or refinance candidates is increasing at a fairly rapid clip.  Home buyers or refinance borrowers might want to contact their favorite broker or lender to discuss these matters and plan accordingly.