Higher Mortgage Rates Could Have Mixed Results

The recent rise of interest rates is creating a buzz in the market, both good and not so good. While many things are happening all at once, no one can say that it was not expected. The only question was when would it happen - home prices up, home sales up, rates up and refinances down. It is inevitable that higher mortgage rates could have mixed results.

According to the recent Standard & Poor's Case-Shiller index, home prices rose 12.1% for the year ending in April. For the month of April, prices were up 2.5% for the 20-city composite index. Data released by HUD and the U.S. Census Bureau shows that sales of newly built, single family homes increased for the third straight month in May with a 2.1% gain on a seasonally adjusted basis, the fastest pace since July 2008. This amount is 29.6% higher than the same time last year.

While these reports are great for the housing market, the month of June has been the month of rising mortgage rates. Rates rose before the Fed meeting and then after the Fed meeting. Looking at the bigger picture, how the housing market reacts to rising rates may not be as most will expect.

Many home buyers are actively trying to beat the rise of rates. At this point, home purchases may be on the increase as compared to what has been happening in the past. Lenders may also reduce their credit restrictions now that rates are increasing or else their own business will remain flat. In addition, the increase of home prices may slow down because of higher rates. Looking further, the industry may even see an increase in home buyers opting for FHA mortgage loans even though FHA guidelines and costs have changed. If consumers want to purchase a home before a significant rate increase, they will use FHA despite the negatives.

Refinance business may or may not suffer because of rising interest rates. Since many homeowners have already refinanced, there will be no need to do so again. However, many homeowners did not qualify for a refinance while rates were low. If lenders reduce their credit restrictions, there could actually be another wave of refinancing which brings in all of those homeowners that were turned away. In addition, rising home prices have brought many homeowners, those were not eligible for the HARP program, out from underwater which may produce an increase in regular refinanced mortgages.

Jumbo loan business is another area that is booming. According to the National Association of Realtors, during the month of April, sales for homes valued between $750,000 and $1 million increased 41%. The rise of interest rates may accelerate this movement since jumbo 30 year fixed rates are the same or only slightly higher than 30 year conforming rates. Jumbo loan borrowers are still getting a bargain. Low but rising jumbo rates may also increase the amount of jumbo refinances since many of these homeowners who originally chose adjustable rates may now look to move to fixed rate loans.

The overall reaction to rising mortgage rates may initially produce poor results in the beginning as consumers get used to the changes. However, once the dust has settled and if lenders reduce their credit restrictions, it may turn out to be business as usual.

FreeRateUpdate.com researches and reports advertised rates of active lenders within the FreeRateUpdate.com network.