by on April 20, 2011
We have discussed the proposed modifications to the mortgage process several times in this blog already. We want to make sure our readers understand the potential impact to the cost of financing a home these changes will have. The cost of buying a home may increase even if prices continue to soften. The total cost of a home is determined by two factors:
- the price of the property
- the expense of financing the purchase (assuming you are not paying all cash)
Interest Rates
Interest rates have remained at historic lows for over a year. As the economy improves, there will be less need for the government to keep rates low. Many are predicting interest rates will increase from 1/2 point to 3/4 of a point before the end of the year. We may also see an additional increase in rate for loans deemed ‘less qualified’.New Mortgage Standards
The government has proposed a new definition for a ‘qualified residential mortgage’. The new standard would set a bar much higher than we have today. Anyone not meeting these requirements would not be eligible for the ‘best’ rates available. What could be the difference in interest rate? In a white paper released last week by a group that included the Center for Responsible Lending and the National Association of Realtors:Some private estimates have concluded that 5 percent risk retention could result in a three-percentage point rise in interest rates for loans funded through securitization. In other words, today’s 5 percent market would become an 8 percent interest-rate market.Even if the rates for these loans are only one percentage point higher than the best rate, the additional cost to a buyer could be dramatic.
Impact of Interest Rates on Mortgage Payment
The interest rate you receive obviously plays a big role in determining your monthly mortgage payment. How big a role? Here is a chart showing how your payment is impacted even if home prices fall:
