Mortgage interest rates directly impact whether a family can afford to purchase a home or afford the one they’re in. Interest rates have held steady for the second half of 2013 but are expected to rise going in to the New Year. Homeowners that have been on the fence about refinancing should do so quickly before rising rates make it unattractive to do so. This comes as a result of the Federal Reserve’s commitment to reduce the amount of bonds it is buying. Their bond buying program has kept interest rates low and homes affordable for millions of Americans.
Freddie Mac wanted to see how rising interest rates would impact the affordability of buying or owning a home. The agency considers a home to be affordable when it costs the homeowner 28% or less of their total monthly income. For example if someone makes $5,000 per month their mortgage payment should be $1,400 or less. Once it crosses that threshold it is no longer affordable as families have additional debts and living expenses that need to be paid on a monthly basis.
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In Q3 of 2013 the average mortgage interest rate was 4.4 percent. At this rate home mortgages were affordable for nearly 70% of the middle class. The percentage changes based on where you live. For example on the west coast, especially in California, a home is affordable for only 36 percent of the population. Homes are so expensive that the average homeowner needs to make at least $100,000 in areas like San Jose. Elsewhere in the country families can make as little as $50,000 to comfortably afford a middle class home. The area home prices, combined with mortgage interest rates, directly impact if the middle class can afford to be homeowners in that area.
With interest rates about to rise, Freddie Mac is concerned about the impact on the middle class. Frank Nothaft, Freddie Mac Vice President and Chief Economist, said, “While most housing markets still remain affordable, rising mortgage rates and rising house prices over the past six months are making it more challenging for the typical family to purchase a home without stretching beyond their means, especially in the Northeast and along the Pacific Coast.”
Their research found that if mortgage interest rates rise to 5 percent homes will only be affordable for 63 percent of the middle class that decreases to 55 percent when rates rise to 6 percent. Historically mortgage interest rates have been around 7 percent. If they were to rise to those levels, a home would only be affordable for a mere 35 percent of the population. That is exactly half of the population that can afford a home today. The warning for homeowners and prospective homeowners is clear, buy and refinance now. Half of the population will be unable to do so if interest rates rise to 7 percent. That is an unnecessary risk when homes are affordable now.
The risk of interest rates rising is based on the increase from January 2013, when they were an average of 3.34 percent, to December of 2013 where rates are around 4.47 percent. This is over a 1 percent increase in only a year and took place while the Federal Reserve continued its bond buying program. By decreasing their bond buying, mortgage rates will only continue to climb. Take advantage of your opportunity to buy or refinance a home quickly.
To learn more about loan programs and how much you qualify for contact an experienced mortgage banker. Speak with an FHA approved mortgage lender to make sure you have access to the most loan programs. You can also learn more about Freddie Mac’s view of home affordability in your area by using their interactive map tool.
