By Doug Goelz, Mortgage Services
Mortgage rates have begun to move higher from the record and near-record lows we have seen for the past several years. The reason for the rate increase is primarily due to actions, and expected actions, by the Federal Reserve Bank, in response to a changing economy and inflationary pressures.
The short and simple explanation of rising rates is that the Fed started buying mortgage-backed securities (MBS’s) at the beginning of the pandemic in order to prop up the economy and hold mortgage rates down. The Fed always said their purchases of MBS’s would be temporary, and that they would back off once they sensed economic recovery. Economic indicators, plus recent inflation, prompted the Fed to announce in January 2022 that they will start tapering their purchase of MBS’s. The announcement has already resulted in mortgage rates rising; subsequent tapering in the upcoming year will cause mortgage rates to rise more.
What do mortgage rate increases mean to you when you want to finance a property? Two immediate results of higher rates are: 1) monthly payments will be higher for the same loan amount and 2) you need more income to qualify for the same loan amount. Below is a chart that compares monthly mortgage payments for an $800,000 loan at a low rate of 2.75% (available in 2021) with payments at increasingly higher rates. Remember that a rate of 4.5% SEEMS high compared to recent low rates, but in the history of mortgage rates, 4.5% is still near the low end.
The chart also compares the required annual income required to borrow $800,000. Don’t view the income requirement as absolute; many factors (including lender guidelines, your debt payments, your credit score) all can impact the actual income requirement. Nevertheless, the chart gives you an idea of the relative change in income required to qualify for an $800,000 loan at various rates.
Interested in how much mortgage financing you can qualify for? Feel free to contact me at 415‐730‐4665 or [email protected] with any questions and to discuss your options.
* Assumes $800,000 30 year fixed rate loan to purchase a single family home, with 20% down, credit scores of 780, no other debt, and using FNMA guidelines.
