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Interest rates have seen better days…

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As 2018 started, the 30-year rates had held below 4% for 26 straight weeks, according to mortgage agency Freddie Mac.

Four percent is now out of reach, even for the best-qualified candidates, with 4.5% the new normal. Home buyers and refinance candidates are scrambling before rates head to five.

Mortgage rates just broke a barrier not surpassed in 204 weeks.

Since April 2014, rates had remained below 4.40%, that is, until the late stages of February, according to mortgage agency Freddie Mac.

What does that mean for the home buyer or refinancing homeowner? A lot.

Home buyers will pay over $100 more per month for a $350,000 home with 10% down.

A homeowner looking to refinance may discover that the new loan may not yield any savings at all.

But there is a bright spot in all this talk of rising rates. Rates are only high compared to some of the lowest levels ever recorded. If you had offered a 4.4% rate to a home buyer ten years ago, they would have jumped at the chance

(The 30-year rate eclipsed 6.5% in 2008).

Rates are still near half their historical average of over 8%. That provides continued opportunity to lock in very low rates, even if they are higher than in recent history.

We’ve entered a new era for mortgage rates.

Many people are asking “Why are mortgage rates rising?”

The economy has made a near-full recovery since almost a decade ago when the housing downturn took its toll.

Unemployment topped out at 10% during the Great Recession and now sits in the low 4s. The stock market is booming, and housing prices are rising, too.

Interest rates usually rise when the economy is doing this well. In the summer of 2007, in the midst of the last boom, 30-year rates neared 6.75% according to Freddie Mac. The boom prior to that — in 1999 — offered rates above 8%.

It’s shouldn’t be much of a surprise that rates are now rising. If economic expansion continues, we could easily see 5% rates in 2018.

Conventional loan rates

Conventional refinance rates and those for home purchases are still low despite recent increases.

The Freddie Mac report described above asks lenders about conventional rates, but not ones for FHA, USDA, or VA loan types.

Yet those programs are worth looking into if you have a small down payment or damaged credit.

Conventional loans, however, are more suited for those with decent credit and at least 3% down (but preferably 5% due to higher rates that come with lower down payments).

Twenty percent in equity is preferred when refinancing.

With adequate equity in the home, a conventional refinance can pay off any loan type. These loans can even cancel mortgage insurance.

FHA mortgage rates

FHA is currently the go-to program for home buyers who don’t qualify for conventional loans.

The good news is that you will get a similar rate — or even lower one — with an FHA loan than you will with conventional.

According to loan software company Ellie Mae, which processes more than 3 million loans per year, FHA loans averaged 4.36% in January, while conventional loans averaged 4.37%.

Mortgage rates today

While a monthly mortgage rate forecast is helpful, it’s important to know that rates change daily.

You might get 4.2% today, and 4.3% tomorrow. Many factors alter the direction of current mortgage rates.

Wages are up. That could spark inflation. Inflation hurts mortgage rates

Americans are making more money.

And, surprisingly, there’s an unexpected relationship between wages and mortgage rates.

When the economy does well, companies must pay more to retain and attract workers. That sounds good, and is for most people. Except for those shopping for mortgages.

That’s because higher wages mean companies pass on those costs. Prices on everything from milk to bulldozers go up. That’s the definition of inflation.

Inflation is bad for mortgage rates, because it eats into investor returns on fixed-rate investments like mortgage bonds. When prices rise, mortgage-backed securities become worth less and less. So interest rates on those assets must rise to keep investors buying.

Higher rates on mortgage-backed assets are passed onto the mortgage shopper.

The Mortgage Reports

Posted 2/23/2108

Tim Lucas

 

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