Mortgage rates are expected to rise into 2010. (art by Christian Ferrari)
Will rates go up or down?
According to numerous experts rates are expected to rise into late 2010 and it could even be sooner.
According to Fifth-Third Bank Senior Loan Officer Bill Channell the “rates are expected to increase mid-year as the government relaxes from propping up the mortgage market.”
Unfortunately, it looks like Bill is right on target. The FED has been purchasing Freddie and Fannie securities to the tune of more than $1 trillion. That program will end on March 31, 2010.
Add that to issues in the bond market and other inflation possibilities and the interest rates will be forced to increase.
How Rising Interest Rates Impact Your Buying Ability
The market was sitting around 4.5% throughout then end of 2009, which is about as low as the market can go. So far in 2010, the rates have increased to as high as 5.5% but has mostly been in the 5% range. I know it is hard to worry about .25% or 0.5%, but let’s take a look at how it affects your buying power.
If I take out a loan for $150,000 at 5% interest rate for 30 years, my monthly payments are $805.23. Assuming you put 20% down (to avoid having to discuss PMI) then your home would be $187,500.
Okay, so let’s take that same $805.23 payment for 30 years, but interest rates go up by 1% to 6%. Suddenly that buying power now has your loan amount shrunk to $134,305 and your total purchase being 167,881.25 (again assuming 20% down. That’s a drop of an amazing 10% in your purchasing power.
I bold that for a huge reason. In Central Ohio we are a fairly stable market … yes we’ve lost value over the past three years, but a volotile interest rate market could be worse for you as a buyer than any other factor.
Are prices going to go up or down in 2010? Nobody really knows, but I haven’t seen a single model that has central Ohio losing more than 4%. Hence opportunity costs by waiting for that possible 4% fall could be lost if rates slide up into the 6% range.
How likely is the rise? Virtually everyone is predicting that interest rates will go up, but the extent is very debatable. Forecasts.org predicts that by July rates will be 5.14% but to just get an 80% confidence level they give a variation of 1.59%. So they are saying that interest rates could be anywhere between 3.55% and 6.73% that’s a huge range.
So basically all we can say is they’ll probably rise and you’ll lose buying power.
