Mortgage rates have risen by almost 75 basis points in the past month, and there is a lot of anxiety in the market over what this means. I have been expecting rates to bounce for over a year, and while you can hardly call 30-year fixed rates in the high 4's problematic (come on, people!), it is important to understand the effect this has on a buyer's ability to qualify.
The rule of thumb with rates has always been that a one percent increase in rates will decrease your purchase power by about 10%.
If rates go up one percent, to 5.50% percent, and you still want a payment that's basically the same in the same neighborhood, you can only do that by reducing your loan amount to $360,000.
In effect, you're borrowing 10% less money for the same monthly payment.
I have felt for a while that rising rates are not necessarily a bad thing, at least in the short term, because there is an army of qualified buyers out there that have simply been biding their time waiting for things to "hit bottom".
The jump in rates this week was in reaction to the proposed extension of the Bush-era tax cuts, along with another 13-month extension of unemployment benefits. Bond traders basically took this as evidence that neither political party is serious about tackling the national debt, and if the country is going to continue to be flooded with fresh currency, rates must rise.
Rates in the 4's continue to be a gift, but the clock is ticking. Affordability may never be higher than it is right now, at least in the lower priced tiers of our market.