Mortgage rates heading up in 2014
Time to face facts.
The record-low mortgage rates we enjoyed last year are gone — and they aren't coming back.
Home loans cost about a point more than they did as recently as last May, and they'll probably go up another point or so by the end of 2014.
We're starting the year with the average rate for a 30-year fixed-rate mortgage — the most popular way to finance a home — at 4.63%.
That's the most they've cost in 15 months and up from a 2013 low of 3.52% last spring.
The reason is simple. With the economy on the rebound, the Federal Reserve is starting to scale back its campaign to drive down long-term interest rates.
Every expert we've spoken with says they've nowhere to go but up over the next 12 months.
Ryan Sweet, for example, is a senior economist with Moody's Analytics, a research firm that advises banks, insurers and other companies.
"We expect 2014 to end with the 30-year fixed mortgage rate at around 5.5% or just a hair below," Sweet says.
National Average Mortgage Rates
|Type of loan||Current average||Record-low average||Established|
|30-year fixed rate||4.64%||3.50%||Dec. 5, 2012|
|15-year fixed rate||3.69%||2.75%||May 1, 2013|
|30-year fixed jumbo||4.73%||3.93%||May 1, 2013|
|5/1 ARM||3.46%||2.63%||May 1, 2013|
But this is no time to despair.
Mortgage rates will remain well below their historical average this year, so financing a house or condo will still be pretty cheap.
Since 1970, the average cost of a 30-year fixed-rate mortgage has been about 8.8%.
And remember, those are all average costs. Savvy borrowers with decent credit can almost always pay a quarter to half point less than that to finance a home.
Spend a few minutes searching our extensive data base for the best current mortgage rates from dozens of lenders in your area. You'll see what we mean.
As for the Fed, it's been buying $85 billion worth of debt a month since September 2012, a fairly even split between Treasury bills and bonds backed by thousands of home loans.
By flooding the mortgage market with money, the nation's central bank pushed mortgage rates to record lows in an attempt to boost real estate sales and property values.
This month, the Fed will reduce those purchases to $75 billion, and further cuts are expected until the purchases end sometime in late 2014 or early 2015.
Lawrence Yun, chief economist and vice president of research at the National Association of Realtors, also expects the average 30-year fixed-rate loan to cost 5.5% by the end of 2014.
While we're likely to see gloomy headlines about big spikes in mortgage rates, Yun says home buyers should keep things in perspective.
"People are used to seeing rates consistently at [less than] 5% in the past few years, but anything under 6% is still historically rare." Yun says. "It's still a great rate, people will just need to make the mental adjustment."
We were paying more than 6% during the early 2000s, 7% or 8% during most of the '90s and well over 10% during the '80s.
A 1% rise in rates is going to make a difference, but it shouldn't be a deal breaker for most buyers.
Let's say you were going to purchase a $250,000 home with 20% down.
With a 30-year fixed-rate loan at 4.5%, you'd pay $1,013 in principle and interest per month. At 5.5%, your monthly principle and interest will be $1,135.
While $122 per month isn't pocket change, that alone shouldn't price you out of a good home.
Use our mortgage calculator to see what your payments would be for any fixed-rate loan.
Indeed, the Mortgage Bankers Association doesn't expect higher mortgage rates to put a damper on home sales.
In fact, it expects home sales to increase by more than 10% this year — counting new and existing properties — and the number of mortgages taken out to finance those purchases to be up more than 9%.
Refinancing is another matter.
Millions of homeowners leapt at cheaper mortgages when interest rates were falling. Many refinanced twice. Some replaced their loans three times.
That boom is over.
The Mortgage Bankers Association expects refinancings will fall by more than half this year.
Which raises the question: With so many homeowners already benefiting from the loan-of-a-lifetime, who should be looking to refinance in 2014?
The answer: Borrowers who couldn't refinance over the past several years because they didn't have enough equity in their homes.
If rising property values have boosted your equity to the point where you can now refinance, rates are still low enough to make it worthwhile.
If you can lower your rate by a percentage point or more, you should at least sit down and run the numbers. Our refinance calculator can help you do that.
We also seem to be having an easier time qualifying for home loans.
The average FICO credit score for home buyers whose conventional loans closed in November fell to 756, according to Ellie Mae Inc., a California-based mortgage technology firm whose software is used by many lenders.
That's 8 points lower than in November 2012.
The average FICO score for homeowners who refinanced through a conventional loan was 734, down a whopping 32 points over the year.
FHA loans clearly helped borrowers with too much debt and lower credit scores, with the average FICO score for purchases dropping from 716 in November 2012 to just 686 this fall.
It's also taking less time for loan applications to be processed and approved as well — an average of 42 days down from 50 days.
Those are exactly the kind of trends that help borrowers land the loans they need, and that should continue into 2014.