Rates have risen over the last month…going up over 1% in less than 30 days. Historically these are still some of the lowest interest rates on record for home loans and we need to keep this in mind. It is still a strong time to buy. Rates are low and homes are still priced well. What is causing rates to rise? There are many factors…inflation and/or quantitative easing are some of them.

1971 to 2013 Graph 30 Year Mortgage Rates
1971 to 2013 Graph 30 Year Mortgage Rates

Inflation is a general rise in the prices of goods/services and often can be tied to buying power. One dollar 10 years ago bought more gasoline than one dollar today. Inflation is one of the many reasons for this. One of the many roles of The Fed is to manage inflation. This is where your mortgage rates come into play. The Fed has been monitoring and maintaining low rates artificially by purchasing bonds and assets from banks. Their argument is that this policy helps keep rates low and assists in making it more attractive for people to borrow money. As money is loaned out people spend money and create jobs…this is the theory.

As The Fed buys less bonds/assets from banks, rates will/should rise. One reason is the banks now have less cash to lend and as availability diminishes cost goes up. The Fed has promised to help maintain low rates through 2015. Certainly more announcements will come with time as The Fed changes/updates policies.

So what does this mean for you the home buyer? Less buying power when rates go up. $100,000 borrowed at 3% costs $421.60 a month on a 30 year loan. at 4% the same loan costs $477.42 a month. Over $50 more a month which means the cost to own that home just went up over $50 per $100,000 of loan. You can see how this could have bigger impacts on $200-300K loans when rates are higher (think 8-9%!).

Home Mortgage Information
Home Mortgage Information

What is reality? Hard to say really…my crystal ball is foggy at best. Most “experts” believe rates will hover in the 4-6% range 30 year fixed for a longer period of time (through next year). These rates are still some of the best rates in the history of interest rates. I remember my first boss telling me about his 1 month adjustable ARM at the low low rate of 11%! So despite lower inventories and rising rates it is still a VERY good time to buy. Any CPA who has been in business more than 10-15 years will certainly agree.