Fixed-Rate, 30-Year Mortgages Surprisingly Steady Despite Fed’s Rate Hikes
A quick look at 30-year, fixed-rate home loans would almost convince you that the Federal Reserve’s dozen interest rate hikes and all the predictions of the housing market collapsing have been meaningless, writes Susan Tompor of the Detroit Free Press. Indeed, the average 30-year mortgage rate (6.39 percent) is only marginally higher than it was 18 months ago (6.30 percent).
The Federal Reserve bumped up short-term rates Tuesday — marking the 13th rate hike in as many meetings — by a quarter of a point to 4.25 percent, the highest level since mid-2001. It was also implied by the board that its campaign to raise rates to fight inflation is nearing an end. But as the Fed was raising rates time and again, something funny happened to the staple, 30-year fixed-rate mortgage. It dropped.
Only in recent months, as bond traders began worrying more about inflation than the overall worsening of the U.S. economy, did long-term mortgage rates inch up. Last week, the national average of fixed-rate 30-year mortgage loans was 6.39 percent, the highest level in more than two years. Yet less than a tenth of a percentage point higher than 18 months ago, according to Bankrate.com.
But don’t let this 30-year calm fool you altogether. Beginning this July, home sales have begun to slow down nationwide.
“The big question in 2006 will be, how much further will the housing market slow down?” Greg McBride, a Bankrate.com senior analyst.
The 30-year mortgage is certainly not the loan of choice for every borrower. There are many types of mortgages, some of which have become surprisingly popular in recent years despite long-range drawbacks. You’re not going to opt for the standard 30-year deal if you’re looking to buy and flip a condo in a hot market for a quick, significant profit — if you are an condo investor in search of an Arizona or Florida home loan, for instance. The same goes for someone trying to buy a bigger, better home in a high-end neighborhood.
“What people have been doing over the last 18 months is using adjustable-rate mortgages at a higher proportion,” Douglas Duncan, of the Mortgage Bankers Association said.
Adjustable-rate home loans (ARMs) have shot up significantly, and many people who signed up for ARMs in the last few years will soon see their monthly payments shoot up.
“It makes life more difficult for potential home buyers — and also for homeowners with ARMs,” said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pa.
CRUNCHING THE NUMBERS
If you took out a 1-year ARM a year ago, you probably received a rate close to the average of 4.15 percent. This year, the rate went up a full percentage point to 5.16 percent as of last week, the Mortgage Bankers Association says. In other words, buyers who tapped into ARMs will soon be seeing their monthly payments grow.
A 1-year ARM secured in June 2004 had an average rate of 4.4 percent, but in June 2005, once that mortgage rate was adjusted, the rate would have gone up to an average of 5.9 percent. Ouch. That equates to an extra $180 per month on a $200,000 mortgage, with the overall mortgage payment of interest and principal rising to $1,181 a month. That’s not all. If the homeowner kept that loan, the rate (and monthly payment) will likely go up again in 2006.
Not all homeowners will feel the pinch immediately, however. Some ARMs may lock in a rate for the first three or five years and won’t adjust until after that time frame. At the same time, economists are not exactly expecting mortgage rates or other interest rates to fall again any time soon.
BATTLING INFLATION
Why has the Fed been raising the short-term rates so consistently? Because the U.S. economy was starting to get stronger, and higher interest rates are seen as a way of putting the brakes on inflation by tempering demand and cooling off rapidly rising prices. Before the rate hikes began, the federal funds rate had at one point fallen to a 46-year low at 1 percent. The Fed had pushed rates that low to deal with uneasiness, recession and terrorism on Wall Street.
Some expect the Fed could again raise rates in January and March to bump up the federal funds rate closer to 4.75 percent by the middle of next year. Dana Johnson, chief economist for Comerica Bank, doesn’t predict that the national housing market will collapse as a result of higher rates, but believes the rising rates will contribute more in the months ahead to the slower housing sales already observed.
He and other experts think the 30-year fixed rate will climb to about 7 percent by later next year, while home sales nationwide drop by 3-4 percent as rates edge upward.
What does this mean for the Florida home loan market in 2006? Be careful. Shy away from the riskier loan options and make sure you do your research. As rates rise, Florida home prices should drop and give first-time buyers some breathing room. Standard 30-year Florida mortgage loans are still strong resources for residents to buy homes and build equity over the long run. It’s the people looking for quick profits that may take the biggest hit.
