It’s a new year, with a new president in the White House, new attitudes permeating through the economic and fiscal sectors—and with all these changes comes uncertainty about home buying opportunities.
What will the mortgage rate trends look like in 2017, Should you sit tight and wait out a new cycle?
The answer depends on whom you’re asking about the mortgage rates, and why you’re thinking of making a change.
Since October 2016 mortgage rates have jumped up by 0.75%, that’s almost a full percent in three months. Many financial industry experts believe that the average mortgage rates will trend downwards from where they are at the beginning of the new year.
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What Goes Up Can Also Come Down
In a December 2016 piece in the Wall Street Journal, Laura Kusisto cited a seven-year run of historically low mortgage rates that had just concluded: with the election, mortgage rates began to climb again, rising from 3.54 percent to a rate of 4.13 percent for a fixed-rate 30-year loan in mid-December (per Freddie Mac).
This represented the highest level since October of 2014. As recently as the end of 2016, many analysts had gone public with firm predictions that the rates would skyrocket from there.
However, what’s good to remember about analysts is that—like weather forecasters—they’re wrong as often as they are right.
In fact, despite some fevered speculations in financial and general news media, the trend seems to have stabilized and started to retreat a bit: as of February 8, bankrate.com cited average rate for a 30-year fixed mortgage was 4.04%, down 0.04 from the week before.
The 15-year fixed rate fell 0.01 to 3.23%, while a 30-year fixed refi rate shrank by 0.05, to 4.06%. The “winner” in this week’s drop, however, is the 30-year fixed jumbo mortgage, which shrank by a sizeable 0.39, from 4.50% to 4.11%.
Fixed-Rate and Adjustable-Rate Mortgages
A Fixed-Rate mortgage mortgage will have the same interest rate each year of the term. Your monthly payment will never rise which makes it the safest term.
An adjustable-rate mortgage, such as the 5/1 ARM will have a low interest rate for the first 5 years of the mortgage loan. After the initial 5 year term has passed the mortgage rate will increase annually. This makes a fix-rate mortgage best for people who do not plan on living in the home for more than 5 years.
Credit Scores Affect on Mortgage Rates
While the mortgage rate trends up or down, the biggest factor in the rate you receive is your credit score. Your credit score is an estimate of how credit-worthy you are and how much of a risk you present to a mortgage company.
Having good credit is crucial to getting the best rates on your mortgage. You will want to make sure you are maximizing your credit scores.
Pay off your credit card balances before applying for a mortgage. Your credit card balance compared to the credit limit is your credit utilization ratio and accounts for 30% of your FICO score. Try to pay down your debt below 15% of the limit to improve your credit rating.
What Makes Mortgage Rates Trend Up and Down?
As with most “money” figures, mortgages respond to the general economic climate. Rates rise when the economy strengthens; in turn, the economy rises on tax cuts and increased federal spending in areas that spur growth, both in terms of wages and the overall GNP.
Mortgage rates are most closely connected with Treasury bond yields—but these also rise in times of inflation. If inflation hits 4%, as it did in 2007, the days of a 4% mortgage rate anywhere, be it your brick-and-mortar lender or an online source, will be over. Instead, you might see rates like we saw ten years ago, when 30-year rates averaged 6.34%.
Just a small percentage point increase in a mortgage rate can cause your payment to rise by amounts ranging from slightly under $100 to several times that…which can make a huge difference in a homeowner’s ability to “move up” versus staying put.
It also means fewer buyers are out there for your home; low rates act as a “brake” on many people who fear they won’t be able to afford a different home if percentages ascend too quickly.
It’s ironic that the higher wages that come with economic growth are, all too often, “cancelled out” by an increase in housing costs that wipe what is a “gain” on paper.
So, say you’re looking to buy in 2017, either a first home or an upgrade. Can you afford to do it?
Once again, the answer depends on whom you ask and what your end goal is.
You can face two possibilities with projected mortgage rates expected to “level off” at about 4.6% by the end of this year (per the National Association of Realtors).
You may have to come up with higher down payments to cut the amount you’re financing in a 30-year fixed loan; or, you may need to do some extra “homework” to find the best loan at a rate you can easily handle.
The good news is, as the old saying goes in sales, “you only need one.” But with the many choices out there, sometimes it’s tough to know what the best “one” is.
Say you’re looking at Freddie Mac numbers, which began February at 4.19% for a 30-year fixed conventional loan. The 15-year mortgage rate is 3.40%, and the 5-year ARM comes in at 3.20%.
That last one’s really tempting: if you can handle the uncertainty of potential changes in your rate after 5 years, you might want to get in line NOW for them…right? Well…
Do Take Note:
- Freddie Mac rates aren’t available to everyone. They’re designed for “prime” borrowers, and those borrowers pay around .5 discount points at closing. You also need a sizeable down payment, and your credit needs to be excellent. Not just good…but superior. If you’ve had some “dings” on your history, or you’re rebuilding credit, odds are you don’t qualify for Freddie Mac.
- Freddie Mac rates, like so many other rates you can see everywhere, are averages. They compile data from some 100 different sources. So, while this information is useful for statistical analysis and prediction, it doesn’t give you figures with which you can walk into your bank.
- Discount points can be a “sticking point” for many people. Many people don’t mind paying even MORE points for a better rate; on the other hand, many of us prefer no closing costs at all, and those mortgages are available—just not through a Freddie Mac lender.
- Freddie Mac’s data apply to what are called “conforming” loans and conventional mortgage rates only. In other words, if you want to finance more than the conventional 80% or so, Freddie Mac percentages won’t apply anyway.
Fortunately, if you’ve shopped around at all, you know more is available for the rest of us than the top-of-the-line “prime” program! Depending on your situation, you can look into FHA or USDA loans or other government-sponsored borrowing possibilities.
These may cost you a bit more than the “going” rate; in many cases, their rates are even lower.
Ellie Mae’s December Origination Insight Report (based on processing over close to 4 million applications per year), indicated that average mortgage rates came in at these levels:
2017 current average mortgage rates
- FHA mortgage: 4.02%
- Conventional mortgage: 4.14%
- VA mortgage: 3.76%
FHA loans, a government-backed vehicle, are new-graduate friendly, so it’s no surprise that some 40 percent of first-time buyers in their twenties and thirties use them. VA loans are an “evergreen” option for home buyers, in that they offer lenient credit demands, require no down payments or mortgage insurance, and are offered to anyone who has served in the military.
If you’re buying in rural areas, you can look into a USDA home loan, otherwise known as the Rural Development Guaranteed Housing Loan (Section 502). Designed to assist purchasers in less dense areas of the country, in which incomes are lower than those in cities, it also requires no down payment and is available to buyers with less-than-perfect credit.
An added bonus: the interest rates are as good as those the VA offers, making it extremely affordable. Finally, there’s yet another new option: it’s called HomeReady,™ and is available to those with modest incomes, requiring only 3% down.
The best news? Low as the rates for these programs are, they could go even LOWER in 2017.
The Bottom Line
Right now, a loan will cost you about $490 monthly for every $100,000 you borrow. Notable EXCLUSIONS include what you’ll need to set aside in escrow for taxes and insurance, flood insurance, and PMI (private mortgage insurance), if your lender requires it.
But from all indicators, this is a good “baseline” to plan around: even the Mortgage Bankers Association predicts that rates may rise slightly this year, but they expect them to remain low—below 5 percent—through the end of 2018.
If you’ve done your homework, comparison-shopped, and realistically assessed your financial situation, the answer to the question, “Can I afford to buy a home in 2017?” might well be a resounding YES.
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