What If Mortgage Rates Go Up?

From 4% to 5%

If the 30 year mortgage rate increases by just a quarter percent to 4.25%, monthly payment increases by 3%, which may only have a minor impact on the market. Half a percent to 4.5% would increase payments by 6.13% and that may start pushing marginally qualified borrowers into the “application denied” pool. With a 1% increase, from 4% to 5%, the monthly payment goes up by 12.44%. Needless to say, in order to qualify household income would have to increase proportionally. That should put a real damper on purchases, especially at the entry level.

The 30 year fixed mortgage rate average, 1979 – 2015, log scale, via Saint Louis Federal Reserve Research – click to enlarge.

Scrambling to lock-in rates

Builders may be particularly vulnerable in this environment. They may see a higher cancellation rate, or may have to offer some concessions to keep deals together. Qualified buyers may become marginally qualified buyers, with less incentive to buy.

What about refinances?

With rates being so low for so long, there are not that many procrastinators left. Those who have not refinanced in the last couple of years are probably not qualified to do so because of lack of equity, or income, or unfortunately they may not fit into any of the many easy refinance programs. If rates go up, say, by 1/2% or more, I expect not to see just a decline, but an abrupt stop to refinancing.

…click on the above link to read the rest of the article…