Fireworks weren’t the only things that shot into the sky on Independence Day. Interest rates on home loans have continued to climb throughout 2013 leaving many unsure of what the future may hold for the housing sector.
This has distressed both investors and consumers alike. But the truth of the matter is that rising rates alone aren’t likely to undo the progress that’s been made over the past few years in the housing market. While rising mortgage rates are unlikely to upend the housing recovery, they will still affect home buyers or potential home buyers in a number of important ways.
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How Rising Mortgage Rates Affect Home Prices
Most analysts predict that if rates continue to rise they will likely curb the pace at which home values appreciate. This is important for at least two different reasons. First, home prices affect the loan-to-value ratio (LTV) of mortgage loans. As home prices increase, this pushes down the LTV for the borrower and potentially makes it easier for them to refinance or even sell their home.
Second, a large portion of the home purchases in the United States over the past several years has been done on behalf of businesses looking to make a profit. The sales were often made on the speculation that the homes purchased would continue to steadily appreciate in value and give the investors a good return. While nothing is ever certain, it’s likely these sorts of purchases will taper off in the face of rising interest rates and slowly rising home prices.
Who Is Affected By Rising Mortgage Rates?
Mortgage banks that make money off of home loans see a sharp decrease in business when rates go up because there are less people willing to refinance. And consumers looking to purchase a home or refinance have a harder time when rates spike because the process to purchase or refinance becomes more expensive. Of course, this doesn’t mean that it’s unwise to refinance in the midst of rising rates. In fact, I would argue that the exact opposite is true depending on what rate you currently have.
If the interest rate on your home loan is somewhere in the ballpark of 6%, then you could still save a lot of money by refinancing. Some mortgage experts have even suggested that refinancing is an intelligent financial choice even if your new rate is only half a percentage point lower than your old rate. Time is running out for those who still want to take advantage of low rates. In the last week alone, the markets experienced the single highest daily rate spike in nearly ten years.
There should be little doubt that the era of widespread access to cheap money has come to an end. It passed not with a bang, but with a whimper. Making smart financial decisions about your mortgage will have to take this into account. Now is as good a time as there has ever been to purchase a new home before it becomes prohibitively expensive. But it’s also a good idea to have realistic expectations about the investment you may be planning on making. In my opinion it would be unwise to invest in a home based on the notion that home prices will rise as they have before. Expect growth but anticipate it being more modest than it has been in months past.
