If you’re looking for a new 30-year mortgage, last week’s events from the financial markets carry a very simple message: Get ‘em cheap while you still can.
Rates on conforming 30-year loans jumped dramatically in just a few days, ending the week at an average of 5.27% according to Bankrate.com. That’s still OK by historic standards, but it’s a jump from the levels seen just a few weeks ago, when you could get loans at 4.75% or below.
The underlying cause isn’t hard to find. Rising government debts, and burgeoning hopes of an economic recovery, are pushing up long-term interest rates on government debt. The yield on the 10-Year Treasury, which was barely 2% near the end of last year, surged to 3.67% late last week before settling back slightly. And that, in turn, pushes up rates on other long-term loans.
What does this mean for you?
This surge in mortgage rates, if it continues, is ominous news all around. It’s bad for those trying to refinance an existing mortgage, those looking to buy a new home, and those looking to sell their home. For those trying to refinance: If you hadn’t locked in the rate already, you are probably out of luck. You may be stuck with higher rates.
For those looking to buy a new home: Be aware this rate hike — to 5.25%, from 4.75% recently — can add quite a bit to your expenses. It will cost an extra $50 a month for someone buying a typical $200,000 residence with an 80% loan.
Rates still look pretty reasonable, but now there’s an extra level of uncertainty in the process. Who knows where they will end up by the time you come to sign?
Some borrowers are now looking instead at adjustable rate mortgages, or ARMs. In some cases the initial rates are lower. Alas, we’ve seen this movie before. ARMs are high-risk and in most cases a terrible idea. They mean the lenders are transferring inflation and interest rate risk to you. In this environment both risks are substantial.
And if you were looking to sell a new home, bad news too: This rate jump adds about 10% to your potential customer’s financing costs. Cheap mortgage rates were one of the things tempting buyers into the market. That is now in peril.