From bankrate Will low mortgage rate lock you into home? By Marcie Geffner • Bankrate Will Low Mortgage Rate Lock You Into Home? Suppose your mortgage has a low interest rate -- lower than you expect to see again. Would you stay put, no matter what, just to keep that low rate? Or would you be willing to sell your home and buy another with a new mortgage at a higher rate? Mortgage lock-in The state of having a home loan with such a low interest rate that the homeowner is reluctant to sell the home because buying another home would require getting a mortgage at a higher rate. The question might seem highly personal. But in fact, whats known as mortgage lock-in is on a lot of peoples minds because it could have important implications for home sellers and buyers, as well as owners. 3 things about mortgage lock-in A rise in mortgage rates tends to be followed by a drop in home sales. Some homeowners stay put so they can keep their low mortgage rates. Most home purchases are driven by personal factors that eclipse interest rates. Deep reduction in sales What will happen as interest rates and home prices rise at the same time? Researchers at the Institute for Housing Studies at DePaul University in Chicago tackled that question for a February 2014 research brief. The result of their simulation model wasnt favorable for housing markets. The growing number of locked-in households will in turn cause a deep reduction in housing turnover, or sales activity, and this reduction will be particularly steep in the strongest housing markets, the researchers wrote. Impact less significant The DePaul researchers conclusion might sound dire. But in fact, the effect of mortgage lock-in alone is likely to be small, says Sam Khater, deputy chief economist for CoreLogic, a residential property information, analytics and services company in Irvine, California. Thats because, Khater says: One-third of homeowners dont have a mortgage, so lock-in doesnt apply to them. Most people move in response to changes in their employment, family situation or lifestyle, not housing costs or interest rates. Mobility has declined during the past 30 to 40 years across all demographic groups for economic reasons that arent limited to housing or interest rates. Mortgage rates affect housing affordability, so some buyers might downgrade their expectations. But they still will buy. The impact of rising rates will be bigger if its over a shorter time horizon, but that impact is not due to a lock-in effect. Its due more to the shock of higher rates, Khater says. Households still want to buy. Theyve made a decision. The higher rate simply reallocates where they move to. Its happened before The last outbreak of mortgage lock-in happened from the early 1970s to the early 1980s, Khater says. Even as interest rates remained elevated after the 1982 recession, home sales remained strong. Interest rates rise; home sales fallAs rates on FHA mortgages rose in the late 1970s and early 80s, existing home sales fell. But even as mortgage rates remained in the double digits in the 1980s, home sales recovered. The supply of homes for sale is increased by newly built homes sold by builders, who arent affected by rate lock-in. Brand-new dwellings represent a small portion of overall home sales, though. Desire to trade up Ken Fears, manager of regional economics and housing finance for the National Association of Realtors, says rate lock-in will certainly have an effect, but the effect is likely to be marginal and not significant in the near term. Many lenders have different rates on their own websites than those posted on Bankrate. In order to get the Bankrate rate, please identify yourself as a Bankrate customer. Rates are subject to change without notice and may vary branch to branch. These quotes are from banks, and thrifts, some of whom have paid for a link to their own Web site where you can find additional information. More information. Powered by: Bankrate Thats because interest rates have remained relatively low and homeowners typically sell their home only every nine years, on average. A lot of people who bought their home that long ago have a large amount of equity, Fears says. When they trade up, theyll have a smaller balance and lower rate, unless they refinanced. For move-up buyers who end up with higher monthly payments, the increased costs are offset by the new homes greater desirability. People will look at their new monthly payment relative to their current payment, Fears continues. But theyll juxtapose that next to what theyll get: more bedrooms, a better school system, shorter commute or new job. The alternative is to buy another car, add on to their house or pay for private schools. At the end of the day, its not just about the rate. Rent it out Nela Richardson, chief economist for a real estate brokerage in Seattle, says mortgage rate lock-in is a bit of a misnomer because it suggests homeowners are trapped in a bad situation. Instead, she says, a low rate is nothing but good news for homeowners because it could allow them to keep their home as a rental property rather than sell it when they move. Or they can tap their equity to remodel rather than move. Those options might mean fewer for-sale homes for buyers, an effect that might be more pronounced in geographic areas and at price points that already have shrunken supplies of for-sale homes, Richardson adds. Still, Richardson also says the effect might be muted because not everyone will stay put. If you live in a one-bedroom condo and youre pregnant with triplets, no rate is going to keep you in place, she says. People get married or get a great job opportunity. Life happens. Housing is a reflection of our lifestyle. A rate is just one factor in a complicated decision. bankrate/finance/mortgages/rate-lock-in-effect-on-housing.aspx
Posted on: Mon, 27 Oct 2014 11:08:18 +0000
Trending Topics
Recently Viewed Topics
© 2015