Recent announcements made by the Federal Reserve point toward a stronger economy in the coming years as the economic recovery continues, but that hasn’t helped to keep mortgage interest rates from rising. Even so, experts say the higher rates shouldn’t scare off prospective homebuyers. A quick look at the math shows that even with a hike of several percentage points the additional monies paid per month are nominal, and some contend that this additional cost will be offset by rising home values. For more on this continue reading the following article from TheStreet.
The Federal Reserve is out with its latest projections for the U.S. economy, and those estimates lean toward the bullish.
At an Open Markets Committee meeting Wednesday and Thursday, Fed officials released the following benchmark projections:
U.S. Gross Domestic Product in 2013: 2.3%
Unemployment rate in 2013: 7.3%
Core inflation in 2013: 1.3%
With those estimates, the Federal Reserve is projecting a strengthening economy but stopping short of easing its monetary stimulus strategy, and it will continue to buy up agency mortgage-backed securities at a rate of $40 billion per month and longer-term U.S. Treasuries at $45 billion per month.
"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee’s dual mandate," the Fed says in minutes released from the Open Markets Committee meeting.
Ostensibly, that should keep interest rates low and mortgage rates from rising too high. But as homebuyers who have done their homework know, rates have risen this year, especially in the all-important summer buying months.
According to the BankingMyWay Weekly Mortgage Rate tracker, rates have risen from about 3.9% on June 1 to 4.6% this week. That’s a fairly significant rise in a short time, and one that could scare off homebuyers who see higher mortgage payments when they see higher interest rates.
But should those rates really scare off potential homeowners? Not really, says Rick Allen, chief operating officer of Mortgage Marvel, an online mortgage services provider.
"Since Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve might slow the pace of its bond-buying stimulus this year, mortgage rates have jumped dramatically," Allen says. "Potential homebuyers might be discouraged, but they shouldn’t be."
Allen lays out the following scenario for homebuyers, maintaining that the difference in mortgage payments from a 3.9% mortgage rate to a 4.6% mortgage rate isn’t all that dramatic.
Take out a $100,000 loan, for instance, and your total monthly payment at 3.9% will be $471.67, while at 4.6 it’s $511.45 — a difference of $39.78. Take out a $300,000 loan and those payments are $1,415 and $1,534.35 respectively, for a difference of $119.35.
While forking over an extra $40 or $120 a month (or somewhere in between) to your bank or lender isn’t optimal, it shouldn’t be a deal breaker to own your own home, Allen says.
Plus, as more buyers step up and buy homes, it drives up the prices of their homes and others, meaning they can make up the lost monthly payments in the value of their own houses — as long as they keep rising, which Allen expects.
This article was republished with permission from TheStreet.