Rising Rates Complicate Affordability

First, know this: mortgage rates are expected to rise this year. In Miami, FHA loan rates sit in the high fours. Conventional mortgages, meanwhile, rest in the low fives. The question is not if mortgage rates will rise in 2014, but when and how.

Lending professionals do not envision mortgage rates reaching 6 percent this year, though high fives are a possibility. In summer 2013, rates unexpectedly rose to 5 percent, climbing a percentage point within two weeks. Sudden and drastic spikes in rates can be a problem, but gradual increases can be welcome; rising rates can motivate prospective buyers to purchase now before rates get even higher.

Affordability is at stake whenever rates rise, and concern that mortgage rates will wipe out a small percentage of prospective buyers is a legitimate concern for some industry professionals. However, the average rate for a 30-year fixed mortgage is a sliver more than 7 percent. The last few years, rates have hovered in the threes and fours; plateauing at 5 percent this year, then, would still be considered a historically affordable rate.

Though rates alone might remain affordable, lending professionals stress that affordability overall will decrease. FHA loan limits were reduced from $423,750 to $345,000 this year, a big difference to many buyers. Furthermore, Home values are rising, and home prices are tagging right along. The combination of higher rates and higher home prices might force some prospective buyers to leave the market, or at least make compromises in their wish list.

“Some buyers might have to broaden their search, as far as what they can afford,” said Miriam Gilmore, a mortgage loan originator with City First Mortgage Services, LLC. She explains that other factors are at play, too. “High taxes and insurance make higher-end, desirable areas not as affordable. Increased rates are just another complication for affordability.”