Mortgage rates have risen so sharply that they are leaving many would-be borrowers with financial vertigo, not to mention bruises from repeatedly kicking themselves.
“When the decision is made for rates to go up, it just snaps. It is like a rubber band. There is not a whole lot of time you have,” said Donald Frommeyer, president of NAMB — The Association of Mortgage Professionals.
A national survey from Freddie Mac shows the average rate on a 30-year fixed-rate mortgage went from 3.35 percent on May 2 to 4.51 percent Thursday. A survey of Colorado mortgage rates from Bankrate.comshows that the state average on a 30-year fixed-rate loan has shot up from 3.41 percent on May 1 to 4.64 percent on July 5.
The spike is strangling applications for mortgage refinancings, which are down by more than half since April, according to the Mortgage Bankers Association.
Mortgage applications for home purchases haven’t been hit as hard, but they are dropping as buyers recalibrate what they can afford.
For someone putting 20 percent down on a $292,000 home, the median sale price in Denver in June, the rate increase translates into about $160 more in payments each month. Over 30 years, the higher-rate loan would cost a borrower $57,000 more in interest.
“We knew higher rates were going to come. We didn’t know the velocity of the increase would be so quick,” said Carey Sulivan, a homebuyer who like many others was caught off guard.
In February, Sullivan and his wife committed $20,000 to start construction on a $575,000 home in the Solterra development in Lakewood.
They could have purchased a nine-month interest-rate lock for $5,000. But Sullivan, a financial planner, looked at the tepid economy, did the math and decided to float with the market until the builder set a firm closing date.
Rates rose sharply after the Federal Reserve signaled in June that it would reduce or “taper” its purchase of mortgage bonds, which total $85 billion a month. It seemed that whenever Fed Chairman Ben Bernanke spoke in public, mortgage rates shot up, Sullivan said.
Although he considers the rate spike a knee-jerk reaction, Sullivan decided to not take any chances ahead of a speech Bernanke was making Wednesday. He locked in at 4.625 percent.
“We locked in today because the Fed is talking tomorrow,” Sullivan said Tuesday.
Taking a longer view, mortgage rates, even after the recent rise, are back to levels that borrowers considered attractive two years ago and remain low compared with the cost of money in earlier decades.
“It is still an advantageous time to be buying,” said Chad Royle, regional-mortgage-sales manager in Denver with Bank of the West.
To emphasize the point, lenders point out that mortgage rates in the early 1980s approached 20 percent. But the psychological benchmark for this generation of borrowers isn’t focused on how high rates got but how low they just were — below 3.5 percent.
Also, homes cost more than they did two years ago, when mortgage rates were last at this level. The S&P/Case-Shiller Home Price Index for Denver is up about 13 percent over the past two years.
Buying a less expensive property is one option for buyers who can’t afford what they thought they could.
“You would have to readjust your pre-approval, and it could affect the amount you can afford,” said Jose Trujillo, vice president of mortgage lending at Centennial Bank in Englewood.
Some buyers in the middle of a transaction who can afford to do so are paying money upfront to buy down their interest rates.
David Bennett, a salaried Redfin agent working in the south metro area, used some of the buyer-agent commission due his firm to help his clients buy down their interest rate from 4.75 percent to 4.25 percent.
“You want to be in the property for an extended period of time,” he advised for those wanting to pay cash upfront to get a lower rate.
For those planning to live in their homes for only a few years, an adjustable-rate mortgage might make sense, Royle said. The widening gap between ARM rates and long-term rates is reviving the popularity of the product.
But going with an ARM can be risky, especially if mortgage rates continue to rise over the next several years, as many analysts expect.
Another question is what higher rates will mean for housing markets, which have finally heated up.
The country has experienced four other large spikes in mortgage rates in the past 30 years, but only one managed to push home prices lower after adjusting for inflation, according to an analysis by Calculated Risk.
An increase that started in October 1993 took the 30-year fixed mortgage rate from 6.83 percent to 9.2 percent by December 1994 — a run-up of 34.7 percent.
The current spike, however, has almost surpassed that percentage increase in a much shorter span, one reason the move has proved so disruptive for potential borrowers.
Absent a recession or big shock from abroad, mortgage rates probably won’t get back to the 3 percent range again, predicted Lou Barnes, capital-markets analyst with Premier Mortgage in Boulder.
“The risk of going higher, even as high as we have gone, is greater,” he said.
A typical run-up in mortgage rates during a cycle is 2 percentage points, Barnes said. That would put rates eventually in the 5 percent range but not much higher.
“We are still in a most unusual economic time. Incomes are not rising as they should. The financial system is not functioning as it should,” he said.
A mortgage rate of 6 percent is the “pain” point where 56 percent of potential homebuyers said they would be less likely to make a purchase,according to a survey taken in late June by Trulia.
Rising mortgage rates have now surpassed rising home prices as the biggest worry that buyers fear, the survey found.
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