Unprecedentedly low mortgage interest rates have been with us for some time now. Currently at about 3.3 percent, conventional mortgage interest rates are half of the recent historical average of 7 percent. Figure 1 illustrates the historical trend of conventional 30-year mortgage interest rates.
Source: U.S. Federal Housing Finance Agency
The difference between 7 percent and 3.3 percent in interest rates has a significant impact on the amount that a household can qualify for. For example, a minimum income required for a $350,000 home, at 7 percent and a 20 percent down payment, would be $90,614. If the mortgage rate is reduced to 3.3 percent, minimum income required for the same home would be $65,151.
The question on minds of many people is what is going to happen to mortgage interest rates in the future. We looked at the forecasts of various housing experts, including Fannie and Freddie, Wells Fargo, Moody’s Analytics, and Los Angeles Economic Development Council (LAEDC), Mortgage Bankers Association of America (MBAA), University of California in Los Angeles (UCLA), and National Association of Realtors (NAR) (see Figure 2). In general, the first quarter of 2013 lined up at 3.5 percent rate on a conventional 30-year mortgage. Going forward, some expect the rates to rise more quickly than others. For the second quarter of 2013, the consensus is that rates will increase to 3.6 percent. The rate is expected to continue increasing throughout the year and moving forward. The year is projected to end short into 4 percent, though some forecast, such as Freddie, expect the rate to stay at 3.8. Moody’s forecasters believe the rate will start increasing at a faster pace than what other experts believe, and foresee the rate at 4.4 percent by the end of the 2013.
2014 will continue putting pressure on the interest rates when the mortgage interest rate is projected to increase up to 4.6 percent, and even to 5.5 percent as forecasted by Moody’s. Both NAR and Freddie anticipate rates close to 5 percent even by the beginning of 2014. While UCLA and LAEDC both produce an annual forecast (not included in Figure 2), UCLA sees rate at 3.7 and 4.7 for 2013 and 2014 respectively, and LAEDC anticipate 3.6 and 4.2 rates for the same time frame.
However, what does a rate increase from 3.5 percent to 4.6 percent mean in terms of a monthly mortgage expense? It means that the mortgage payment on a home priced at $350,000, excluding taxes and insurance, will increase from $1,660 per month to $1,838.