In this episode I discussed several factors that may be contributing to the inevitable rise in interest rates that industry experts are expecting to take place over the next 8-9 months.
Hello and welcome to another episode of the Reside Daily Bite; I’m your host, David Doucette. Today, I want to talk to you about interest rates and the reality that they will be going up, how soon, how quick, we don’t know and by how much remains to be seen. But we think they will definitely be going up.
And I want to show an article that came out of San Francisco Gate about a month or so ago. It talks about the Federal Reserve and that they’ve been pumping a lot of money into the real estate sector – $1.25 trillion; that program ended last month. Mark Zandi, chief economist with Moody’s says, “Housing has been on government life support, and without it the crash would have been much more severe,” He also states, “This spring and summer as those policy efforts unwind, we most likely will see mortgage rates move higher and more house-price declines.”
And the experts are agreeing “that the Fed’s exit will cause mortgage rates to rise, the big unknown is how severe the effect will be.” Guy Cecala, publisher of Inside Mortgage Finance states, “There is no question rates have been kept artificially low by the Fed’s heavy buying…My opinion is that rates will go up a full percentage point initially,” meaning that 30-year fixed conforming loans, now hovering around 5 percent, would hit 6 percent.
And that’s what we’re hearing as well; by the end of the year, mortgage rates could be at 6% (we really don’t know). A lot remains to be seen. With that said, I want to give you an example of the difference between a 5% mortgage and a 6% mortgage.
So at 5%, a $500,000 mortgage (this does not include property taxes or insurance, just the straight mortgage), your payment will be about $2,700. At 6%, that same $500,000, your payment is going to be about $3,000. Difference of about ($300 multiplied by 12) to $3,600 per year. $3,600 is a lot and this is for the same mortgage, the house, it’s just a difference between 1%.
Let me just show you what over the life of a 30-year mortgage looks like. You’ll spend a roughly (in a 5% interest in $500,000 loan over that 30 year) $466,000 -just on interest. On a 6% loan, it’s going to be more – it’s $579,000. So, a difference of about almost $115,000 over the life of that loan.
Now, most people stay in their home or move every 5-7 years but when you look at the numbers like these, it shows how much difference between just 1% interest rate can make.
This is really important for the fence sitters and if you are on the fence, especially on the Westside of Los Angeles where we know the Westside is picking up. Couple of episodes ago I talked about areas like Palms and Mar Vista are up about 10-11% from where they were last year. So, if you’re on that situation, you really need to get off your tookus and really take advantage of these rates -that they’re hovering around 5% because in another 8 or 9 months, will maybe be closer to 6%. And as we just talked about, we can see how that can really cost you money.
You can also listen to my podcast with Dean Piller, my mortgage broker, called “The Cost of Waiting” and there are several other factors in there that makes it more expensive the longer you wait.
If you have any questions, comments, anything you notice in your particular neighborhood area that you want to share with us, 1-800-476-5579 or email email@example.com. My name is David Doucette and thank you so much for checking out the Reside Daily Bite.