Have the days of the sub-5% mortgage passed?

A spike in mortgage rates may have left would-be home refinancers wishing they hadn't waited quite so long.

Rates for conforming 30-year fixed loans -- the plain vanilla mortgages that make up most of the market -- jumped from an average 5.03% last Tuesday to 5.44% on Thursday before slipping to 5.30% Friday, according to HSH Associates of Pompton Plains, N.J.

Monday  they edged up again, to 5.38%, HSH Vice President Keith T. Gumbinger said today.
 
The bond market, which ultimately determines what happens to interest rates, tends to drive them down when the economic outlook is bad. Signs that the economy may no longer be getting worse contributed to the shift away from the rates under 5% seen in recent months, Gumbinger said.

Other reasons for the move, he added, include bond investors' demands for higher rates because of worries that inflation may return sooner than anticipated, a flood of new sovereign debt being issued, and "what seemed to be pretty shoddy treatment of GM bondholders by the administration."
 
Bankrate.com senior analyst Greg McBride said federal government borrowing to fund its huge deficit spending is driving up borrowing costs for everyone, "and for consumers that means higher mortgage rates."

"If you wanted a sub-5% rate, that opportunity has passed you by," McBride aid.

But heavy Federal Reserve purchases of Treasury bonds and mortgage-backed securities should in the short term keep the cost of home loans at what historically are extraordinarily low levels, he said.

"They may not necessarily be able to bring rates to sub-5%," McBride said, "but they can keep a lid on mortgage rates."

The upward tick is expected to slow refinancings more than home purchases, because, as Gumbinger put it, "The interest rate is just one of a number of planets which must align" for a home to get sold.

Still, the higher rates, if sustained, could put some additional downward pressure on home prices, since interest rates do affect affordability.

-- E. Scott Reckard

Comments

[Economist E]

It's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down.

Patrick Killelea

[Ace]

Hopefully they are gone forever. Bring back the 10 percent mortgage. Cheap money hasn't helped anyone.

[puckhead]

Ace,

It's helped me refi below 5%, knock a few years off of my mortgage and add some $ to my kids college fund. You would rather pay 10% to the banks??????????? That's like saying I'd rather kick myself in the nuts.

[jbunniii]

This is great news! Rising interest rates means falling prices. It's far better to pay a high interest rate and a low price than vice versa. You can always refinance the mortgage in the future when rates fall again, but you can't do anything to lower your principal. Also, it's better to lock in a low property tax instead of a high one.

[Laker]

I agree.
But if you understand the power behind printing money like Bernanke does, you will get to the conclusion that we are going to see an interesting phenomena.
We will have many home owners that have upside down houses but very good monthly payments. So if they don't need to sell, those would be rock and rolling.

For ex, say you can buy a house now for $700,000 with 4.5% mortgage and 20% down. Your monthly is about $2800. If prices correct another 20%, but interest rate goes up to 7%, you'll get to buy the house for $560, 000 but have a monthly of $2,980.
Yes, you can save the $40,000 from the down payment , but how much have you paid in rent for waiting the 1-2 years...probably $40,000 for a comparable house if not more....
This is true ONLY if you want to buy the house and stay there as primary residence. For flippers and speculators, that is going to be a big mistake...

[Cal]

"For ex, say you can buy a house now for $700,000 with 4.5% mortgage and 20% down. Your monthly is about $2800. If prices correct another 20%, but interest rate goes up to 7%, you'll get to buy the house for $560, 000 but have a monthly of $2,980.
Yes, you can save the $40,000 from the down payment , but how much have you paid in rent for waiting the 1-2 years...probably $40,000 for a comparable house if not more...."

Lets say we take this at face value and ignore all the usual Laker logic holes.. a simple question. Which one of those two scenarios is riskiest to the borrowers long term financial health? Meaning life happens, jobs change, families change, incomes change... Which house is the safer bet for long term financial stability.. they are not both equal just because the P+I are close. The second scenario is a much safer bet. People are gambling a lot more than they know in todays market, that wage inflation kicks in (so other people can afford to pay more for a home) and rates stay low (otherwise it eats into the affordability equation) before anything happens where they have to move.

[SoCalJim]

Let rates rise and housing prices fall so some people can pay cash and never pay a dime of interest on a house... And for those calling a "bottom" - how do rising interest rates help that cause since given a monthly payment that someone can afford / be approved by the bank, if rates go up, housing prices must go down, unless someone has a magic money making machine (like our stupid government).

[Laker]

Cal,
No logic holes.
I agree that it is sure riskier...but that who doesn't take risks, will not drink champagne. That is why i said it is applicable to those that want to stay long...and like the place they are bidding.
Those who live 2 year, and move to the next flip (like they did from 2000 to 2007) will be screwed.
Cal, you have to agree with me that 4.5% FIXED rate loan for 30 years is a great product. You can ask the 1974 mortgagees about how was it feeling in the 90's to pay $300 in mortgage while their neighbor is paying $2000....
I think that in 15-20 years from today that will be the case again.