Mortgage Rates Climb Higher

Over a three month period, mortgage rates climb higher and higher. In November, I was quoted and locked a mortgage rate of 4.125% with no points. I put 10% down and have relatively good credit. 4.125% is a good mortgage rate. Yes, I had friends and clients buying homes with rates of 3.9 and 3.875, but these people had excellent credit, or more money to put down, or they bought their home in August. Mortgage rates started increasing last fall, but are steadily climbing higher and higher. Rates shot up nearly as straight as The Tower of Terror at Disney World over the past few months. I now have clients with excellent credit, 20% to put down, and strong stable income being quoted rates as high as 4.75%. We’re still in the 1st quarter of the year! The fed plans to raise interest rates three more times in 2018. It is my opinion that mortgage rates will definitely go over 5% this year.

What does this mean for hopeful buyers?

Buying is still an option, but some buyers may see themselves get priced out of the home or neighborhood they want. Higher rates mean higher payments, and that means an increase in Debt to Income (DTI.) If your DTI percentage is too high, you’ll have to either find a cheaper house, or pay off some debt. In Houston, Texas, finding a cheaper house can be difficult. Paying off debt takes time. Plus, a bigger payment just sucks too. Today, at 4.5% interest, the monthly payment on a $477,000 home is ~$3,700. At 5.5% (just 1% higher), the monthly payment increases to ~$4,300.

What about the supply of available homes?

Hurricane Harvey took a big bite out of Houston last summer, and we’re still dealing with low inventory. In areas where flooding is very unlikely, we’re seeing rapid value increases. As these homes continue to become more expensive, and interest rates continue to rise, buyers may get priced out of these neighborhoods. Buyers that really are interested in buying will have to start exploring other neighborhoods.

What about the tax changes?

The tax changes have slowed down interest in homeownership for the short term. However, studies show that only 2% of the population will be affected by the new tax laws and how they apply to real estate related deductions. Buyers with a mortgage below $750,000 will still be able to maximize their property taxes and mortgage interest deductions. Rather than let tax changes scare you, talk with your accountant, a mortgage lender, and a real estate professional to see how the tax changes will affect you personally.

Are there other changes?

For many buyers, the maximum DTI has been raised to 50%, a 5% increase over last year. This means you do have an extra 5% of wiggle room to qualify for that mortgage even if the rates push the payment up a bit. This also means if you are shopping in a desirable neighborhood and prices go up, you still have a little wiggle room. However, it wouldn’t hurt to pay down some debt if you can.

What’s the take away?

If you have dreams of homeownership, you should get aggressive about making it happen in 2018. With rates rising, the sooner you buy, the greater your chance of keeping your payment manageable. If you wait to pay off more debt or save more money, you might actually get stuck with a rate so high, your monthly payment becomes unreasonable. It is completely possible to buy with as little as 3% down, and locking in a lower rate now will save you money in the long term. Don’t wait. Start the conversation today with myself, and my mortgage friend, Chad Helmcamp of Legacy Mutual Mortgage. With a team like us, you’re in great hands!