As predicted for some time, mortgage rates are on the rise. The average rate on a 30-year fixed-rate mortgage was up nearly 1 percentage point this April over April 2013, landing at around 4.5%. Experts are estimating that that rate will reach 5 or 5.5% by the end of the year.
While this presents homeowners and buyers with financial challenges, surprisingly, it has also spurred some good news as well.
With higher interest rates, reports Marketwatch.com, fewer homeowners are refinancing. This means that lenders are looking for more business. As a result, says Marketwatch, lenders are willing to make allowances for those with “less-than-perfect” credit. (For a conventional mortgage backed by Freddie Mac or Fannie Mae, buyers might need a 620 vs. the 640 or 660 FICO score needed last year; on FHA loans, buyers might get away with a 580 FCIO score, vs. the 620 or 640 needed a year ago.)
Lenders are also loosening requirements for down payments on conventional loans. Instead of the 20% down payment required in the recent years, some lenders are asking for as little as 10%. (But “Don’t be mistaken,” warns Marketwatch. “It’s nothing like 2006, when borrowers could put down no money at all and get a mortgage…you still need to have solid credit to get a mortgage today, and you need to prove your income.”)
Finally, higher interest rates also mean that it takes less time to close a mortgage, as lenders aren’t as busy, and lenders are providing better service in order to attract more customers.
The down side, alas, is the same as it’s always been: higher cost over the course of a loan. Rising interest rates means buyers can afford less house for the same monthly payments and sellers essentially add to their asking price and get no benefit in return.
The big takeaway here is that those considering buying a home should do so now, before rates rise again.
This chart from Real Estate Insider shows how rising interest rates affect buying power, based on a 20% down payment for a conventional 30-year fixed loan:
Get more tips about financing your home at RE/MAX of Cherry Creek’s blog.
RE/MAX of Cherry Creek