Mortgage Debt
The Mortgage Bankers Association announcement today with the 30-year fixed rate moving three basis points higher last week to 5.61%, still historically very low. The bigger piece of news from the MBA shows refinancing applications surged 16.6% higher last week as consumers work to re-liquefy their balance sheets (pay off Christmas credit card bills) to lower cost debt. Overall the MBA’s applications index increased 7.3% with the purchase index only growing by 0.3%.
Roughly one-third of all mortgages are adjustable-rate mortgages. Last week the average contract rate for one-year adjustable mortgages was 4.08% and 30-year fixed rates stood at 5.61%. When long-term interest rates really begin to rise in earnest, I suspect many homeowners will want to lock-in a fixed-rate or they could see their variable rates adjust much higher over the coming years. If variable rate borrowers move to a fixed rate, they will see their mortgage payments go up substantially. If they don’t fix the rate, they could easily be paying 8% or 9% four or five years from now.
The best case scenario would be to switch from a variable rate to a fixed rate before long-term rates break higher. To make the change right now, a borrower with a mortgage of $250,000 would be paying $1,205 per month with a variable-rate at 4.08% and the move to a fixed-rate at 5.61% would take the monthly payment to $1,437, nearly a 20% increase in the monthly payment. Most mortgages in bubble areas far exceed $250,000. What would that do to disposable income and consumption?
Most homeowners have continued to borrow against their hyperinflated homes through variable rate HELOC's Home Equity Line of Credit. Combine the higher mortgage costs with higher energy prices and moribund wage growth (against inflation) and we get a recipe for lower consumer spending, the backbone of the worlds economy.
Roughly one-third of all mortgages are adjustable-rate mortgages. Last week the average contract rate for one-year adjustable mortgages was 4.08% and 30-year fixed rates stood at 5.61%. When long-term interest rates really begin to rise in earnest, I suspect many homeowners will want to lock-in a fixed-rate or they could see their variable rates adjust much higher over the coming years. If variable rate borrowers move to a fixed rate, they will see their mortgage payments go up substantially. If they don’t fix the rate, they could easily be paying 8% or 9% four or five years from now.
The best case scenario would be to switch from a variable rate to a fixed rate before long-term rates break higher. To make the change right now, a borrower with a mortgage of $250,000 would be paying $1,205 per month with a variable-rate at 4.08% and the move to a fixed-rate at 5.61% would take the monthly payment to $1,437, nearly a 20% increase in the monthly payment. Most mortgages in bubble areas far exceed $250,000. What would that do to disposable income and consumption?
Most homeowners have continued to borrow against their hyperinflated homes through variable rate HELOC's Home Equity Line of Credit. Combine the higher mortgage costs with higher energy prices and moribund wage growth (against inflation) and we get a recipe for lower consumer spending, the backbone of the worlds economy.
Comments