Rising Interest Rates May Lead To Increased Housing Activity
Aloha Happy Mortgage
Oh boy, what a month of volatility in the bond market.
I remember when we were locking 30 year fixed rates at 3.125% with no closing costs, and here we are, after two months, with rates close to 4.125%-4.375%. The real estate market in Hawaii has not slowed down; instead, mortgage applications for purchases rose by 56% last month, indicating more buyers are getting off the fence to secure a property.
According to a recent survey, “57% of respondents expect home prices to rise in the next 12 months” and “the number of consumers expecting rates to rise over the next 12 months spiked to 57%.”
But buyers have many loan program options today. The conservative “30 Year Fixed” is already being replaced by “7/1 ARM” by a few self-employed borrowers who tend to possess more liquidity in their portfolio.
I am not a big fan of the ARMs, the Adjustable Rate Mortgages, because I am worried about the potential increase of the rates and the affordability level of the borrower, but if the borrower has enough cash to lower the principal amount after the fixed period in order to enter into a different loan, then the ARMs are not so bad.
Choosing the right ARM, for example the 7/1 (fixed for 7 years) compared to the 5/1 (fixed for 5 years), may be more beneficial to some borrowers who are expecting to refinance into a 15 year fixed in the next 7 years.
Consider a $500,000 loan amount: the 30 year fixed rate of 4.125% results in a $2,423.05 monthly payment compared to a 7/1 ARM rate of 2.875% that carries a $2,074.46 payment per month. The savings difference of $348.79 a month can represent an additional principal pay down, which overall will lower the total principal amount owed after the 7 years, thus helping the borrowers to still refinance into a 15 or 20 year fixed, and possible high interest rates in the future will be offset by the lower principal amount owed.
It may be too early now to consider getting a 7/1 ARM as an alternative to a 30 year fixed, but when rates rise even more, then we, as loan officers, will experience a change in program selection by the borrowers.
In the meantime, we are still blessed to have 30 year fixed rates below 5% and we should take advantage of it.
If you are interested in purchasing a house and would like to get pre-approved, please contact Valeria at 808-333-9701 or email at HawaiianLoans @gmail.com. As of July 2013, turnaround time to close a mortgage loan is 14 days for purchases.