With the Fed officially ending is Mortgage-backed Securities (MBS) purchase program at the end of this month there is a potential for rates to rise.
The Fed has been purchasing MBS since January 2009. When completed, the Fed will have purchased $1.25 trillion to help provide support to the mortgage and housing markets. The goal was to keep interest rates low and stable, and also keep banks lending. The good news is that the purchases have been slowing down consistently since September of last year to ease the transition.
Below is a chart of where interest rates have been since 1971. (Source: Freddie Mac). Rates are truly at all time lows!
In the Fed's statement released on March 16th the Fed confirmed that the program will in-fact not be extended. However, they explained that the situation will be monitored and they may start it up again if necessary. “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”
Most experts agree rates won’t rise immediately, but that rates are currently the lowest that they will be for some time (if not ever). There has been a lot of speculation about how high rates will actually end up. Currently, with the Fed’s help it is believed that rates are currently .75% lower than the market will bear. But ultimately no one can predict the future. Some educated guesses are 5.7-6% by the end of the year, and ultimately settle around 6-6.5%.
So if rates do increase over the next year, what would this really mean?
Below are a few scenarios for $200,000 financed (rates at 5%, 6%, and 7%):
$200,000 financed @ 5%: Monthly P/I would be $1,074
$200,000 financed @ 6%: Monthly P/I would be $1,199
- Difference vs. 5% of $117/mo OR ~$19,500 in amount financed
$200,000 financed @ 7%: Monthly P/I would be $1,331
- Difference vs. 5% of $257/mo OR ~$38,500 in amount financed
- Difference vs. 6% of $132/mo OR ~$20,000 in amount financed
Below are a few scenarios for $400,000 financed (rates at 5%, 6%, and 7%):
$400,000 financed @ 5%: Monthly P/I would be $2,147
$400,000 financed @ 6%: Monthly P/I would be $2,398
- Difference vs. 5% of $251/mo OR ~$42,000 in amount financed
$400,000 financed @ 7%: Monthly P/I would be $2,661
- Difference vs. 5% of $514/mo OR ~$77,500 in amount financed
- Difference vs. 6% of $263/mo OR ~$39,500 in amount financed
In summary there is roughly a 1% interest rate to a 10% amount financed correlation. For example, at $200,000 the same borrower with rates at 5% would have to finance $20,000 less at 6% to have the same monthly payment. Similarly, at $400,000 the same borrower with rates at 5% would have to finance $40,000 less at 6% to have the same monthly payment.
Do you think this means that housing values will need to adjust if and when rates begin to go up?
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