Recession Interest Rates on the Rise? Why?

Published by julia | Filed under Buyer / Seller Tips, Miscellaneous, Real Estate, Shout Outs

We are clearly in a spending recession and the real estate market is feeling the pain of the consumer who now wants to rent instead of buy. People are scared to enter into new home loans and furthermore, the lenders are tighter with the loan money today than they have been in the past 10 years or more. With a very slow rise in existing home sales and the overall median price of homes sold, why are the interest rates climbing?

In April of 2009 the mortgage interest rate hovered around 4.85%. In May 2009 that number jumped to more than 6.5% and now in July the number is steady at 5.5% for a 30 year fixed mortgage. Sure, the ARM is lower at a mere 4.37% for a 1 year rate moving to adjusting in the second year, but isn’t that the type of mortgage that gave the real estate market such a catastrophic downturn in the recent past?

In February 2009, the 30 year fixed mortgage rates could be found for less than 5%. That is when bloggers first started reporting mortgage applications on the rise. One could assume a direction relationship between the low fixed mortgage rates and the rise in mortgage applications. If the economy is so important and boosting that economy means people have to spend money and start buying homes again, why not keep the rates at that lower level instead of allowing them to rise?

What Does 1% Really Cost Anyway?

A 1% difference in a mortgage interest rate could cost a lot of money over the life of the mortgage. Of course, there are many factors that need to be taken into consideration such as the total purchase price of the home and the repayment schedule. But, taking a $200,000 mortgage being paid back over 30 years at a fixed interest rate, that 1% could cost the homeowner more than $43,000.

Calculations:

$200,000 Mortgage @ 4.5% for 30 years = Monthly Payment of $1,013.37 =  $364,813.20 Repaid
$200,000 Mortgage @ 5.5% for  30 years = Monthly Payment of $1,135.58 = $408,808.80 Repaid

The real estate market is growing and people are buying, but the real way to boost the consumer confidence in buying a new home is to give them back that $43,000. No $8,000 incentive is worth the $43,000 they could save with a small 1% deduction in the 30 year fixed mortgage interest rate.