Imagine buying a new home and charging it on your Visa or MasterCard. I know, you’re thinking, “Yeah, right! Paying more than 18% interest on a 30-year fixed-rate mortgage.” It’s almost unthinkable, isn’t it? But that was reality for home buyers in October of 1981 – a year when mortgage rates topped out at 18.5% and the average rate was nearly 17%. A retired commercial real estate broker living in Myrtle Beach likes to tell of his first apartment complex sale. It carried a second mortgage at 21%. And the Buyer thought be was getting a deal.
Unlike today, in the early 1980s, the Federal Reserve was waging a war with inflation. In an effort to tame double-digit inflation, the central bank drove interest rates higher and higher.
In the early 1980s, the high interest rates had a negative effect on the housing market. Affordability dropped to an all-time low as mortgage rates climbed to all-time highs. Simply put, mortgage rates priced most Americans out of the market, and it took years for home sales to rebound. Today, rates are still historically low for a number of reasons, but largely thanks to the Federal Reserve going to great lengths to keep rates down in the interest of facilitating economic stability and recovery.
The national average cost of a home today is $322,700. In the 18.45% interest rate environment of 1981, with a 20% down payment, the monthly mortgage payment would have totaled $3,986. The total payments after 30 years would have totaled about $1.43 million, with about $1.18 million going towards interest alone.
Today, with interest rates hovering a little over 4.5%, monthly payments on that same $322,700 home would be $1,308 – less than a third of the payment at 18.45%. Total payments over the life of the loan would total $470,880. Only about 45% of the total payments would now apply to interest as compared to the 1981 example where 82.5% went toward interest.
Interest is important when it comes to calculating the total cost of a house over the life of its mortgage. At 18.45%, the total interest payment would amount to more than $900,000 over the life of a loan at today’s rate. That’s enough cash to buy an another house, maybe even a beach house in Pawleys Island.
Even with the recent mortgage rate upticks, rates are still historically low.
Most potential buyers consider low interest rates a very important factor when it comes to purchasing a home. Predicting which way rates will go in the short term or long term is difficult, so taking the current low rates for granted might be a mistake.
Mortgage Interest Rate Predictions for October
There is no shortage of market-moving news for October. Developments are forming now that will affect a borrower’s ability to buy a new home in the near future and in the remainder of the year to come. The consensus of The Trembley Group Real Estate Professionals see three factors driving mortgage interest rate trends.
- Tariff wars will cause rates to fall…or rise
President Donald Trump is working toward trade deals that he sees as fair for the U.S. economy and workers.
Tariffs are now in effect for steel and aluminum, which affects companies that make everything from soft drinks to kitchen appliances. More than 1,300 Chinese products are on the list, and President Trump has proposed a new 20 percent tariff on cars coming from the European Union (EU).
Tariffs – proposed or already in place – will push mortgage rates in opposite directions simultaneously in September. Since the final effect of these changes is unknown, the markets can only speculate on the effect of each new development.
The Case for Falling Mortgage Rates
Rates could fall due to increasing concerns of a recession. In a perfect world, raising prices of foreign goods encourages domestic production, which helps the home economy.
But tariffs rarely go unanswered. Typically, the foreign country slaps tariffs right back, resulting in a trade war.
That means American companies have a harder time selling goods outside the U.S., which could result in layoffs and decreased production. For example, motorcycle maker Harley Davidson already announced moving some operations overseas due to retaliatory EU tariffs and another Chicago manufacturer recently announced its move to Mexico because of steel tariffs.
The tax policy nonprofit Tax Foundation estimates more than 300,000 jobs could be lost due to existing and proposed tariffs.
Mortgage rates could fall if investors predict that trade wars would do more harm than good.
The Case for Rising Mortgage Rates
On the other hand, tariffs could induce inflation, which could cause mortgage rates to rise.
Tariffs increase prices for raw materials and other products from foreign sources. Companies pass along higher prices to consumers.
Looking at a very specific example, Toyota estimates that proposed tariffs on foreign autos would raise the price of its popular Camry by $1,800. Additionally, Coca-Cola has announced higher soda prices due to tariffs on aluminum.
Tariffs could prove inflationary if similar results are seen throughout the economy.
Such inflation erodes the value of long-term investments such as mortgage-backed securities (MBS), the asset upon which U.S. mortgage rates are based.
When inflation picks up, mortgage rates must rise to keep investors buying MBS.
Should Homebuyers Lock-in Now?
As a mortgage shopper, it’s likely unwise to bet on a tariff-induced recession (and therefore lower rates). That would take a while if it happens at all.
But, homebuyers should watch for talk of new, big tariffs. Rates could drop if investors are worried about a recession in the aftermath.
Such rate drops would be short-lived, due to the recent upward trajectory of rates. Home buyers should complete a home purchase mortgage application so that it’s ready to lock it in when the time comes. Keep in close contact with The Trembley Group Real Estate Professional for up to the minute advice.
- The Fed will keep its foot on the gas
The most recent Federal Open Market Committee meeting adjourned August 1. As expected, the group did not raise rates or shift policy.
If they happen at all, rate hikes will happen in September and December or December and January. The Trembley Group Real Estate Professionals feel confident that Federal Open Market Committee will continue raising the federal funds rate this year and next.
In June, Fed chief Jerome Powell stated, “With unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.”
The Fed does not want the U.S. economy to get too hot.
Rampant growth could lead to inflation and an eventual crash landing for the economy — a situation the Fed is striving to avoid.
For a mortgage shopper, the bottom line is that the American mortgage market is in a rising rate environment. Homebuyers who haven’t locked in a home purchase rate yet should seriously consider it. Waiting could become costly.
There’s little hope in economic circles that rates will fall back to pre-2018 levels any time soon.
- The hot economy will continue to put upward pressure on rates
Many mortgage borrowers wonder what the economy has to do with mortgage rates.
In a word: everything.
Mortgage rates tend to be higher when the economy is doing well. That’s because inflation takes off and investors seek higher returns than mortgage bonds can offer.
In response, mortgage interest rates must rise to keep investors interested in them at all. Hence higher rates for consumers.
The unemployment rate is currently just under 4.0%. Unemployment hasn’t been this low since the year 2000.
There doesn’t seem to be any cracks in the economy, either. Recent tax cuts have fanned the fire, and companies are on a hiring spree.
The Economy Is Hot and the Unemployment Rate is Less Than 4%
This is all good news. You probably have a job, and you might be more likely to get a raise than at any time during your career thus far. But the flip side is, you’ll likely receive a higher mortgage interest rates.
If you’re in the market to buy a home, don’t expect rates to drop in 2018. It appears They’ll continue to rise for the remainder of the year.
Mortgage rates have had their ups and downs over the past few months and it appears that trend will continue for some time to come. Today’s home buyers are advised to get pre-approved.
Interest rates affect both purchasing power and home prices. A lower rate allows buyers to offer higher prices for homes. Affordability drops when rates rise and the number of buyers who can afford a higher priced home drops too. This caused demand to drop. When demand drops, there is less competition for homes. It is competition for homes that is drives up prices when mortgage interest rates are low and causes prices to drop when mortgage interest rates rise.
What Should Buyers Be Doing Now?
Right now is probably the best time to buy a new home for this year and next. Mortgage interest rates will continue to rise into the foreseeable future. For those folks considering financing a home in the near future the wisest thing to do is to start getting personal finances in order. For those who are unsure, this might be the time to take a leap of faith. Pre-qualification for a home based on current rates is a good place to start. Here at The Trembley Group, we have all the resources to help you in this process which includes several incredible local lenders.
The Trembley Group Real Estate Professionals always encourage their clients to meet with one of their strategic mortgage lenders. Mortgage pre-approval and mortgage pre-qualification have similar benefits for anyone considering a home purchase with a mortgage. Both show the seller that the prospective buyer is a serious contender. The buyer has taken the time and energy to sit down with a mortgage lender and provide the information necessary to know the price-range of home that will fit their budget. Many sellers will require a pre-approval or pre-qualification letter for any buyer planning to use a mortgage. And even if a seller doesn’t require it, a pre-approval letter or pre-qualification letter may help an offer stand out.
Mortgage Pre-Approval and Mortgage Pre-qualification
There is a subtle difference between pre-approval and pre-qualification. Pre-qualification is often seen as the first step in the mortgage process, and pre-approval is the next step. With pre-qualification, buyers supply an overview of their financial history to the lender, including income, assets, debts, and credit score. The lender reviews this information and gives an estimate of a qualified mortgage. Mortgage pre-qualification doesn’t always require documentation of a financial history. It is often self-reported.
Mortgage pre-approval is similar, but it usually requires documentation and verification of your income, assets, and debts. And it will require a credit check, creating a hard inquiry on your credit report. Pre-approval usually carries more weight with a seller, as it should. Neither pre-approval nor pre-qualification is a guarantee that a buyer will receive a loan from the lender.
“It’s a good idea to enlist a mortgage broker at the beginning of the home buying process,” says Donna Cox of Movement Mortgage. “If the pre-qualification process identifies a difficult loan scenario, a good mortgage broker can shop a client’s loan and avoid any potential last minute roadblocks. Usually one lender might be willing to do what another won’t. The best thing a borrower can do is minimize situations where problems may surface. In other words, keep your credit score in good shape, make sure to maintain a steady job, keep money in the bank, and stay current on debts and other obligations.”
A Little Last Minute Advice
Finally, the experts at The Trembley Group Real Estate have a few suggestions that can save buyers money over the life of their home mortgage loan.
- Pay a little bit extra each month. Even a little extra will lower the size of the principal, save big money on future interest payments, and shorten the term of the loan substantially.
- Buy a home now if you can afford to do so. The lower the rates, the less interest you’ll pay overall. With current mortgage interest rate trends, a better deal might not come along for a very long time.
At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice.