Mortgage rates, chickens and eggs

The Mortgage Bankers Association reported this week that applications for home loans fell 7.3 percent last week on weaker refi and PropertyRoundsLogonew purchase activity. At the same time, banks upped the interest rate for conforming loans to 3.67 percent, a rise of just 0.41 percent from the previous week.

Is there a correlation between the rise in rates and the drop in applications? We’re not sure. Sort of a chicken and egg, thing.

But we did check to see how much the rise in rates could have cost some home buyers and there are implications for further increases.

If a person buying a home a $300,000 home in Danbury put down 20 percent and financed at the 3.59 percent rate of two weeks ago, they’d have a monthly payment of about $1,089.80. That doesn’t include taxes, insurance, etc.

Buying that same house a week later at the 3.67 percent rate would increase the monthly payment $11 to $1,100 per month, according to’s mortgage calculator.

Not a tremendous burden, really, it’s three or four cups of coffee at Starbucks a month.

If the rate, however, were to go up a full percent, to 4.59 percent, a person buying our Danbury home would have to pay $1,228.91, a month.

Here in the Mighty Financial Mines, as one reader recently dubbed us, we wondered what would happen to the market if interest rates went up.

Those eggs are cooked

Those eggs are cooked

There are several scenarios, of course. Probably the best has the Fed raising rates when the economy starts growing at a stronger pace, thawing out the great wage ice age. In that case, people could probably afford to pay more as hiring increases and employers provide raises and the real estate market could continue to improve.

But, if rates go up in a weaker economy, there is a chance the market could slow down with some people get priced out of it. And in a worse case scenario, prices could actually fall, as sellers have to cave to the reality of what buyers can actually finance.

Unless, of course, the bankers do something like, loosen up their underwriting standards…

But for now, a jump in rates doesn’t look likely, though it is, as Ed Deak, the don of Connecticut Econ, posited in our future.

“They can’t stay at zero forever,” he said in a recent interview.

Jumbo loans also went up according to the MBA, rising to 3.87 percent. Refinance activity was down 8 percent and purchases were off 4 percent.

Check out the MBA for more info.


Rob Varnon