When you apply for mortgage financing in Massachusetts you should expect to spend some time gathering basic income related documentation to provide to your loan officer for review. Your mortgage professional is going to review this documentation to make certain that your debt to income ratio fits within certain predetermined underwriting parameters. Â But what happens when mortgage rates spike before you have found the new home of your dreams?
Until recently this question was answered pretty easily by either buying down your interest rate with pre-paid interest sometimes called “points” or waiting to lock in a rate once the market has some weak economic data and then a subsequent pull back in mortgage rates.
The interest rate environment for summer of 2013 has painted a different picture for prospective home buyers in Mass. The past few summers were marked with record low mortgage rates caused by fear in the global market. When investors are spooked by geopolitical events or weak economic data they invest their money in less riskier assets such as bonds. So when investors are turning on the news and watching Middle Eastern governments collapse and fears over a potential European debt crisis, Â the tendency is to allocate more capital into bonds pushing mortgage rates lower. This is the reason there has been a refinance boom the last few years. Worries for the European Union’s financial strength have eased for the time being and a slow but steadily improving labor force here in the U.S. has boosted confidence in the local housing market. Many Americans have sat on the sidelines the last few years afraid to make the jump back into the housing market. Not so this year. All of the housing data for Massachusetts quickly turned a buyer’s market into a seller’s market as the inventory of available homes for sale has greatly diminished.
The combination of these factors compounded by the reality that eventually the Federal Reserve is going to taper their bond buying program sooner rather than later, has pushed rates up dramatically in the last 2 months. Below is a chart from data complied by Freddie Mac that is released on a weekly basis. That data shows a dramatic upswing in mortgage rates since May.
12 Month Mortgage Rate History
This leads us back to are original question;what happens when mortgage rates spike before you have found the new home of your dreams?
If your purchase loan is already in process and your rate lock is in risk of expiring it makes sense to pay the additional premium to extend your rate lock. The few hundred dollars it make cost you extend your rate lock is better than the literally tens of thousands it could cost you in interest payments to re-lock at a higher rate. Most lenders will not allow you lock in a rate until you found a home because once that money is “locked” it’s allocated to you and can’t be utilized by the bank to make other loans which is how banks stay in business.
A 1% increase in mortgage rates means that a Massachusetts’ resident has 10.75% less in purchasing power. So if you were pre-approved to buy a home for $300,000 you now are forced back down under $270,000 and possibly out of your first choice neighborhood. You may consider the option of utilizing an adjustable rate mortgage (ARM), which typically has a lower start rate than a fixed rate mortgage, or putting down a larger down payment. ARMs in a rising interest rate environment are not recommended by most financial professionals and for many just the thought of an ARM brings back the memory of the mortgage crisis of just a few years ago.
The market is changing and your best ammunition is knowledge, preparation, and keeping a realistic expectation. The affordability index is still favorable and from a historical standpoint, mortgage rates are low, so focus on the what’s available not the opportunities that may be missed.
This Post is “Mortgage Buddy Approved”
