What If FHA Rates Go Up?

by Peter G. Miller
December 29th, 2009
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The past year has been a wonder of low mortgages rates. The weekly reports from Freddie Mac have generally shown that rates for 30-year fixed-rate loans have hovered at or below 5 percent. In fact, in December mortgage rates actually reached 4.71 percent with .7 points — an interest level that ought to make a lot of people very happy.

The catch is that we don’t know if similar rates will be available in 2010. The view here — for what it’s worth — is that not only will rates be higher, they must increase. Here’s why:

Higher Rates

Rates have to go up because they’re ridiculous, absurdly low at this time. Next year we’ll have fewer lenders as mortgage brokers either disappear or have less to offer. Rates also have to go up because the government has massive deficits, the country continues to run a huge trade imbalance (though not as bad as in the past) and court decisions are making mortgage lending more risky.

Being part of the financial world, higher interest levels will inevitably will mean higher FHA rates.

At this point we stop to imagine the horror and heartbreak of rates rising to 5.5 percent or even 6 percent. You can just hear the outcries from various real estate groups.

If you think that FHA rates will rise — and remember there are no guarantees in this game — then you need to think about the present.

Is Now The Time?

This is the time to refinance with an FHA mortgage — if you think rates will rise.

This is the time buy and finance your purchase with an FHA loan — if you think rates will rise, if your market has begun to stabilize and, if, you find a property which makes sense for your situation.

The alternative is going to be this:

Imagine that today you can get an FHA mortgage at 5 percent. Imagine that your household income is $6,000 per month before taxes. Let’s say that the monthly cost for property insurance is $100 and $250 for taxes. Let’s also say that 31 percent of your gross monthly income can be devoted to mortgage interest, mortgage principal, property taxes and property interest.

The Numbers

Let’s see: $6,000 x 31 percent = $1,860. $1,860 less $350 ($100 for insurance and $250 for property taxes) leaves $1,510 for principal and interest. That means one could borrow $281,285.

Change the interest rate to 5.5 percent and the maximum loan size shrinks to $265,944.

Smaller loan amounts limit the ability of buyers to bid for given properties. That’s not good news for sellers and it’s not good news for the effort to stabilize home prices.

The bottom line is that if you agree with the idea that mortgage interest rates are likely to rise, then now would also be a very good time to consider your financing alternatives, including FHA loans.

If you think rate will remain stable or decline, they you have a longer time horizon to finance and refinance.

Whatever the case — Happy New Year to all.

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This entry was posted on Tuesday, December 29th, 2009 at 7:26 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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