Higher Rates Causing Concern for Buyers? Take a Closer Look

Written by Posted On Thursday, 17 June 2021 00:00

Potential homeowners keep an eye on interest rate moves. And so do lenders. Higher rates mean borrowing power is diminished. Some become more serious ‘rate watchers’ than others. Others less so. But just reading the headlines of recent rate moves need to be looked at with a little more scrutiny. Recent Federal Reserve moves, or the lack of them, indicate inflation isn’t a problem. As a matter of fact, the ‘Fed’ would like this rate to move up from where it is today. 

The Federal Funds rate is the interest rate that banks charge one another so the borrowing bank can meet federal reserve requirements. If a bank sees its reserves falling below a certain level, the bank needs to borrow money…fast. It’s the Fed Funds rate that is charged for the transaction.

What is the Fed Funds rate now? 0.25%. It’s also interesting to note the Fed would actually like to see this rate closer to 2.00%. Historically, 2.00% is not enough to cause inflation but strong enough to indicate a healthy economy.

Now let’s return to the headlines. The Mortgage Banker’s Association collects and reports mortgage loan activity. An increase or decrease in the number of applications submitted can be a key indicator on the health of the economy. These applications can be either for a purchase or a refinance. If purchase loan activity is on the rise, the housing market is doing pretty well. If purchase loan activity falls, it can be a sign the economy is a little soft, or soon could be. But without looking at the details, potential borrowers might make a decision they shouldn’t have…either to wait to buy and finance a home or put off refinancing. 

Various news outlets reported earlier that mortgage refinance applications dropped by 20% as the average mortgage rate hits a 10-month high. If one just read the headlines, they’re not getting the full story.

What is the full story? Part of that story is that yes, while refinance applications fell, there’s a pretty good reason for it…most everyone who could have benefitted from a refinance has already been down that path. Essentially, the refinance bucket of applications is now empty. There are fewer people that could benefit with a refinance. That would then mean fewer people would apply for a new refinance. And for those who have decided to temporarily put on hold a purchase because of this news, they’re making a mistake. 

Yes, refinance demand dropped but we all know why. But it’s not because rates moved to a 10-month high. Potential buyers? The details are less staggering. The average 30-year fixed rate rose to 3.36%. But from where you might ask? 3.33%. That’s right, the rate increase making headlines is the result of a jump in rate of 0.03%. Let me put that in dollars for you. With a $300,000 mortgage, the increase is a paltry 5 bucks. 5 bucks led to the recent headlines.

I certainly get that reporters have to report stuff or otherwise they wouldn’t be reporters. But all you need to do is visit financial websites and you’ll see articles pointing to rate increases. However, unless you look at the details, you’ll find these rate moves aren’t all that impressive after all.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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