Mortgage rates will rise – but when?

WASHINGTON – Oct. 13, 2014 – Mortgage rates have hovered around yearly lows for weeks. But with rate-hike forecasts looming, can buyers count on borrowing costs to stay low?

Many economists now predict that the average 30-year fixed-rate mortgage will reach 5 percent by the middle of the next year, according to a New York Times report. On Friday, Freddie Mac reported the 30-year fixed-rate mortgage averaged 4.12 percent.

A hike in rates will come, in part, from the Federal Reserve's plan to stop buying mortgage-backed securities.

Economists note that a 5 percent mortgage rate is low by historical standards, but that type of increase will still reduce buying power in a home purchase. For example: A 1 percent increase in interest rates can raise a monthly mortgage payment on a typical home by more than $700 in pricier parts of the country. However, the increase would likely be much more modest in other, less expensive markets.

But even in the case of rate hikes up to 7 percent, the analysis found that homes still remain affordable overall. From 1985 to 2000, homeowners' housing costs – including the principal and interest on a median-priced home – accounted for 22 percent of a homeowners' median household income. However, today's households spend about 15 percent of their median income on a median-priced home.

Source: "When Mortgage Rates Rise," The New York Times (Sept. 25, 2014)