While mortgage borrowing costs are on the rise, they are still well below peak levels. The second quarter of 2013 witnessed the interest on mortgage rates reach 4.25 percent on a standard 30-year fixed-rate loan. As recently as early May, that same rate was at 3.5 percent. For every $100,000 in home price, today’s higher rate adds about $40 a month to the cost of a 30-year fixed-rate mortgage, compared to when a 30-year fixed-rate was at 3.5 percent. With mortgage borrowing costs expected to continue their upward trend, will investors be able to capitalize on current conditions? More importantly, will they be able to easily persuade owners to sell?
Everyone has heard that rates are rising, and they are definitely convincing more individuals to buy homes because they still remain affordable. A recent report out of Harvard’s Joint Center for Housing Studies shows that households could afford the mortgage payment on the median-priced home in 95 percent of metro areas in 2012. Rocio Sanchez-Moyano, a research assistant with the Center, calculated that even if the 30-year fixed-rate rose to 5 percent, 93 percent of metro areas would still fall into the affordable range.
However, while mortgage borrowing costs have still remained affordable, other fees have risen even faster. These fees have served to increase the real total APR and expense of taking out a home loan, as more cash is being handed over to banks at closing. According to a new 2013 BankRate.com survey, origination and underwriting fees are up 8% over last year’s. The increase is in addition to rising credit checks, appraisals and other third party vendor costs. According to the survey, the states with the most expensive closing costs were Hawaii, Alaska and South Carolina.
While experienced real estate investors and especially those flipping houses may be untouched by these increased borrowing costs, property owners need to recognize their risks. Rapidly spiking mortgage lender fees mean buyers have to come up with more cash to buy at closing, often on top of already burdensome down payment requirements.
This could take a good chunk of buyers out of the game and drive down cash flow and cap rates. While this won’t be significant enough to hamper the current housing recovery, it definitely signals the time to put homes on the market and strike a deal to sell is now.