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Rising interest rates, what does it really mean?

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For the first time in many years interest rates are rising. The conventional wisdom about rates is that they drop slowly but rise quickly and we can see that now. For the past several years mortgage rates have been around 4% or lower. Now they are pushing above 5% and may go higher. This has all happened within the past several weeks after several years of low rates. Mortgage rates are priced based on the movement of US Treasury bonds usually the 10-year Treasury bond.

When the 10-year bond rate rises,Ā mortgage rates will tend to rise, and they will move simultaneously. In a rising rate environment like this it is not unusual to see rate changes during the day not just from one day to the next. If you want to see the trend in mortgage rates look at the 10-year Treasury bond.

What this means for home buyers is that the payment on a certain dollar amount of mortgage has gone up and will probably go up even more over the next several months. For example, a 1% rise in rate will mean a difference of $118.81 per month on a $200,000 mortgage. This means that a buyer will not qualify for as much of a mortgage now as she would have a few months ago. A buyer qualifying for a $200,000 mortgage last year would now only qualify for a $177,000 mortgage on the same property this year.

For the last several years rates remained relatively stable and there was little risk in waiting on making an offer on a property. That has changed now. As I said rates tend to move up quickly and all the indicators point to higher rates over the next year or so. So, this may be the best time in a while to lock in what are still low rates by historical standards. In the late 1980’s rates were over 10% and had been significantly higher. So, a rate in the 5% range is still attractive compared to back then.

Of course, if I knew for sure where rates were going I would be out skiing somewhere trading Treasury bonds on my cell phone but why risk missing out on the right house for you because rates have moved up?

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