Long Term Mortgage Rates

Mortgage Rates Continue to Rise for the Fourth Straight Week

Long-term U.S. mortgage rates rose for the fourth straight week as lending standards continue to tighten. The rates on 15-year, fixed-rate mortgages and five-year adjustable-rate mortgages hit the highest level since 2011.

Mortgage giant Freddie Mac says the rate on 30-year, fixed-rate mortgages averaged 4.22 percent this week, the highest since March and up from 4.15 percent from a week earlier. They stood at 4.19 a year ago.

The rate on 15-year, fixed-rate loans, popular among homeowners who refinance, rose to 3.68 percent this week, the highest since July 2011 and up from 3.62 percent last week and 3.41 percent a year ago.

The five-year, adjustable rate rose to 3.53 percent from 3.52 percent last week and it's the highest since April 2011.

Rates are rising as the Federal Reserve attempts to control inflation amid signs of economic strength. The Fed is widely expected to raise short-term rates when it gathers again in March, though it held off at its meeting this week. The Fed raised rates three times in 2017.

To calculate average mortgage rates, Freddie Mac surveys lenders across the country between Monday and Wednesday each week.

The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. The fees were all unchanged this week at 0.5 point for 30-year and 15-year mortgages and 0.4 point for five-year adjustable mortgages.

Reverse Mortgages are a Sticky Business

Financial advisers often suggest you delay taking Social Security until full or normal retirement age (FRA) if not later – to age 70.

And the reasons are many: You'll get 100 of your primary insurance amount (PIA) if you wait to claim at FRA and, depending on your birth year, anywhere from 124 percent to 132 percent of your PIA if you wait until age 70; your surviving spouse will receive the highest possible benefit if you delay taking Social Security until FRA; and your monthly benefit will be higher after cost-of-living adjustments than if you had claimed before FRA.

But the delay often means finding income to make up the difference between what you would have received from Social Security – on average, it's about $1,369 a month now – and what you need for living expenses.

In recent years, advisers have suggested Americans do one, all or some combination of the following to bridge the gap: work, draw money from taxable, tax-deferred or Roth accounts and use a reverse mortgage.

The strategy to use a reverse mortgage to delay taking Social Security, however, has come under fire of late. In August, the Consumer Financial Protection Bureau (CFPB) issued a report that explored the tradeoffs of borrowing a reverse mortgage loan to delay claiming Social Security.

The CFPB found that, in general, "the reverse mortgage loan costs exceed the additional increase in Social Security that homeowners would receive in their lifetime by delaying Social Security benefits."

For instance, the CFPB noted that those who use a reverse mortgage to delay taking Social Security "assume debt for the principal loan amount, as well as for interest, mortgage insurance premiums (MIP), and monthly servicing fees, which are added to the principal every month."

The CFPB also wrote that origination and closing costs are often added to the loan balance since most consumers choose to finance these costs using the reverse mortgage proceeds. Over time, the balance of the loan increases as a result of compounding interest and MIP, and fees.

Furthermore, the CFPB wrote, using this strategy generally diminishes the home equity available to borrowers later in life.

Experts say the CFPB got some things right in its report, such as the risks associated with reverse mortgages. But experts took issue with the report's methodology and assumptions, which might cause homeowners to unnecessarily dismiss reverse mortgages as a retirement-income tool worth considering.

So, how might you go about thinking about the use and value of a reverse mortgage as part of your retirement-income plan?

• First, analyze. For many Americans, the equity in their home is their largest asset, says Marguerita Cheng, chief executive officer of Blue Ocean Global Wealth. And that equity can be turned into income with a reverse mortgage. But homeowners shouldn't use a reverse mortgage to delay taking Social Security, or for any other reason, in the absence of an analysis that addresses trade-offs, risks and rewards.

"Future debt is a risk, but the risk has to be weighed with the reward of what is being created," says John Salter, an associate professor at Texas Tech University. "There are no free lunches. But we should always have a comprehensive toolbox of strategies, and we must find the right tool for each person."

Cheng agrees that a reverse mortgage or a home equity conversion mortgage (HECM) might not be right for every person in every situation. But, she says, a reverse mortgage could help many widows and divorcees who often have lower Social Security benefits, lower 401(k) and IRA balances and increased health care costs achieve a better outcome in retirement.

• Manage longevity risk. Tom Davison, a partner emeritus with Summit Financial Strategies, says using a reverse mortgage to delay taking Social Security is primarily a risk reduction strategy rather than an income-maximization strategy.

"As risk reduction, it does indeed maximize income, especially in the later years," he says. "And the 'later years' is the key. It pushes the most possible inflation-adjusted, tax-advantaged dollars into those years."

• Manage sequence-of-return risk. Retirement researchers increasingly say homeowners ought to consider a HECM with a line of credit to manage the risk of having to withdraw money from retirement during down markets. The researchers call withdrawing money from falling retirement account balances sequence-of-return risk.

• When not to use reverse mortgage. "Everyone wants to age in place," Cheng says. "But reverse mortgages don't make sense if it's not the right home to age in place. They also may not make sense if the house is too expensive to maintain."

College Debt No Longer a Deal Breaker for Millennials

Home buyers with student loans could find it easier to get a conventional mortgage under some important new rules.

And parents who took on student debt to help their children go to college now have a new refinance option to tap into home equity to pay off those student loans, as well. It might make sense to refinance out of a higher student loan rate into a lower mortgage rate for some, but it's not smart for everyone.

Fannie Mae has re-done its rules to reflect the growing burden that student loan debt has on many households. Outstanding student loan debt now adds up to more than $1.4 trillion, according to the Federal Reserve Bank of St. Louis.

Overall household debt today is just 0.8 percent below its peak of $12.68 trillion reached in the third quarter of 2008, according to the Federal Reserve Bank of New York.

Bill Banfield, executive vice president of capital markets for Detroit-based Quicken Loans, said it became more difficult for many borrowers with student loans to obtain a mortgage when tighter guidelines relating to college debt went into place after the financial crisis in 2008-09. Under the restrictions, he said, lenders had to calculate student debt payments according to certain, generally more conservative formulas when underwriting a new mortgage.

One such calculation: The lender could take 1 percent of the outstanding student loan balance to calculate the potential monthly student loan payment. So a mortgage applicant with $30,000 in student loans would be considered to be paying $300 a month for student loans.

How much you're paying on other debt, of course, influences how much you can afford to pay for a new mortgage.

In reality, though, Banfield said the borrower could be paying far less than that $300 a month under some situations, such as when the borrower has an income-driven repayment plan that reduces their monthly payment.

Under the rule change, the lender now can accept the student loan payment information that's included on the borrower's credit report. For some millennials and other borrowers, the change can help provide more access to a mortgage.

Fannie Mae said its new policies address the obstacles to home ownership that hit because of a significant increase in student loan debt over the past decade.

"We think it's going to help people with student loans qualify," Banfield said. "It's a positive and meaningful change. "It doesn't mean we're taking on more risk necessarily. It just means we're not penalizing people with an overstated payment on their student loans."

Under Fannie Mae's new rules, the lender can take into account student loans that are actually paid by someone else, such as the parent, too. Documentation would be needed to prove that the parent is making the monthly payments on the student loans taken out under the child's name. For example, lenders must obtain the most recent 12 months of checks or bank statements to prove payment by the parent and there can be no delinquent payments in that 12 months.

But if the parent is paying those loans, the younger borrower is better able to take on a monthly mortgage payment. Fannie Mae said that looking at debt paid by others would widen borrower eligibility to qualify for a home loan.

Banfield said it is not unusual to hear millennials say that their parents are making their student loan payments.

Perhaps the parent didn't have savings or want to use their savings to pay college tuition and room-and-board, but the parent feels comfortable paying off a child's student loans over time.

"Who doesn't want their child to have a higher education?" Banfield said.

Sometimes, it's cheaper for a student to take out loans than the parent. For example, undergraduates who obtain student loans get a lower rate than parents under federal student loan programs. The rate on subsidized and unsubsidized federal loans taken out by undergraduates is 3.76 percent for loans taken out between July 1, 2016 and July 1, 2017. The interest rate is fixed for the life of the loan.

By contrast, the current rate is a fixed 6.31 percent for Parent PLUS loans first disbursed on or after July 1, 2016, and before July 1, 2017.

Rohit Chopra, senior fellow at the Consumer Federation of America and former assistant director of the Consumer Financial Protection Bureau, said the new cash-out refinancing option for home owners will likely be marketed to parents who want to pay off some of that student loan debt, too.

Under the new cash-out refinancing program, cash taken out of the equity in the home would go directly to the student loan servicer to fully pay off at least one loan.

Chopra noted that the Parent PLUS loan rate can be higher than the going rate on mortgages. But parents have to make certain that the mortgage rate they'd qualify for when they refinance would be lower than what they are paying on student loan debt.

Another attractive selling point: Mortgage interest is deductible for people who itemize so refinancing could be an advantage to some parents.

But it's important to pay attention to your own tax return and situation. Depending on your income, student loan interest is deductible for some taxpayers. The maximum amount of student loan interest that can be deducted from your income each year is $2,500. If you're in the 25 percent tax bracket, for example, the tax savings would be $625 if you were able to claim the full $2,500. This deduction applies to the interest payment – not the entire payment on your student loans.

The interest paid must apply to qualified education loans, which include federal student loans, private student loans, and parent education loans.

The student loan interest deduction is claimed as an adjustment to income. So you can claim this deduction even if you don't itemize deductions on Schedule A of Form 1040.

And income limits apply. To qualify for the deduction, you'd have to have a modified adjusted gross income that's less than $80,000 if single or less than $160,000 if married and filing a joint return.

But before anyone rushes to take equity out of the house to pay off student debt, ask another question: Will you be putting your home at risk?

If someone has a good paying job and stable employment, refinancing could help. But someone who could face a layoff or a wage cut could be signing away some student loan benefits that can ease the financial pain when a hardship hits.

Borrowers who hold federal student loans and face financial difficulty can tap into attractive deferment and forbearance plans, loan forgiveness options and income-driven repayment plans. By applying for an income-driven repayment plan, a borrower can obtain a monthly payment amount that is intended to be affordable based on your income and family size.

Income-driven repayment options on federal student loans cap federal student loan payments at roughly 10 percent of the borrower's income. These programs are generally targeted at student borrowers, not parents, though some ways exist for parents with Parent PLUS loans to deal with some hardships.

"Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble," Chopra said in a news release.

Federal Rate Hike Almost a Sure Thing

U.S. employers added a robust 235,000 jobs in February and raised pay at a healthy pace, making it all but certain that the Federal Reserve will raise short-term interest rates next week.

Friday's jobs report from the government made clear that the economy remains on solid footing nearly eight years after the Great Recession ended.

The unemployment rate dipped to a low 4.7 percent from 4.8 percent, the Labor Department said. More people began looking for jobs in February, a sign of confidence that raised the proportion of Americans working or seeking work to the highest level in nearly a year.

The gains in hiring and pay, along with higher consumer and business confidence since the November election, could lift spending and investment in coming months and accelerate economic growth. Americans are buying homes at a solid pace, and manufacturing is rebounding, in part because of improving economies overseas.

The February jobs data likely provides the final piece of evidence the Fed needs to feel confident enough to resume raising rates. A rate increase at the Fed's meeting next week would mark its third hike in 15 months, a reflection of how far the economy has come since the recession ended.

Average hourly pay rose 2.8 percent year over year in February, a decent gain though slightly below historical averages. In a healthy economy, wages typically rise at a roughly 3.5 percent annual pace.

Last month's hiring was boosted by 58,000 additional construction jobs, the most in nearly a decade. That figure was likely enhanced by unseasonably warm weather in much of the nation.

Friday's report was the first to cover a full month under President Donald Trump. During the presidential campaign, Trump had cast doubt on the validity of the government's jobs data, calling the unemployment rate a "hoax." But just minutes after Friday's report was released at 8:30 a.m. Eastern time, Trump retweeted a news report touting the job growth.

An array of evidence suggests that the U.S. job market is fundamentally healthy or nearly so. Hiring over the past two months has averaged 237,000, up from last year's monthly average of 187,000.

The number of people seeking first-time unemployment benefits – a rough proxy for the pace of layoffs – reached a 44-year low two weeks ago.

Business confidence has risen since the presidential election, with many business executives saying they expect faster economic growth to result from Trump's promised tax cuts, deregulation and infrastructure spending.

The U.S. economy is also benefiting from steadier economies overseas. Growth is picking up or stabilizing in most European countries as well as in China and Japan.

The 19-nation alliance that uses the euro currency expanded 1.7 percent in 2016, an improvement from years of recession and anemic growth. Germany's unemployment rate has fallen to 3.9 percent, although in crisis-stricken Greece, unemployment remains a painful 23 percent.

In the United States, employers have been hiring solidly for so long that in some industries, they're being compelled to raise pay. Hourly wages for the typical worker rose 3.1 percent in 2016, according to a report this week by the Economic Policy Institute. That's much higher than the 0.3 percent average annual pay gain, adjusted for inflation, since 2007, the EPI said.

Minimum wage increases last year in 17 states and Washington, D.C., helped raise pay among the lowest-paid workers, the EPI found. Pay increases for the poorest 10 percent of workers were more than twice as high in states where the minimum wage rose as in states where it did not.

At the start of 2017, minimum wages rose again in 19 states, a trend that might have helped raise pay last month.

U.S. builders are breaking ground on more homes, and factory production has recovered from an 18-month slump, fueling growth and hiring. In February, manufacturing expanded at the fastest pace in more than two years, according to a trade group. Businesses have stepped up their purchases of industrial equipment, steel and other metals, and computers.

And in January, Americans bought homes at the fastest pace in a decade despite higher mortgage rates. That demand has spurred a 10.5 percent increase in home construction in the past 12 months.

When should buyers lock in a mortgage rate?

A mortgage rate lock helps protect homebuyers from fluctuating mortgage rates as they're getting ready to buy a home. It locks in the interest rate for a loan for a certain period of time until the buyer makes it to closing. By locking in a rate, buyers will know what to expect and won't have to worry about rising rates later.

However, if rates dip, homebuyers realize they could get stuck paying more money each month. So it can be a catch-22.

Best times to lock in a mortgage rate right away:

1.An offer has been made, accepted and is under contract. Many lenders lock in a rate for free for 30 days. However, buyers may want to lock in for a longer period, for example, if the buyer is giving sellers more time to find a home, or if they're self-employed and a lender needs more time underwriting their loan. As such, lock-ins are also available for 90 days, 120 days or even 150 days. But expect to pay more for longer lock-in periods.

2.Interest rates are rising. If interest rates are trending higher, lock in sooner rather than later, say mortgage experts.

3.Interest rates are volatile. If interest rates are going both up and down, buyers may want to lock in sooner for greater stability during their house hunt. "Rates today are unusually volatile – they are making large moves up and down in short periods of time," says Joe Parsons, a loan officer at Caliber Home Loans in Dublin, Calif. "For this reason, prudent borrowers are locking their rates early in the process."

4.A buyer may not otherwise qualify for a loan. A buyer may need to lock in a rate sooner if they are borrowing near their limits because any upward fluctuation could prevent them from getting their loan approved. For instance, if a higher interest rate pushes a buyer's monthly mortgage payment above a 28 percent threshold (most lenders believe a house payment should be no greater than 28 percent of your gross monthly income), then a lender may not approve a mortgage at all.

Finally the Long Term Mortgage Rates Stop Rising

After nine straight weeks of increases, long-term U.S. mortgage rates fell this week.

Mortgage buyer Freddie Mac said Thursday the rate on 30-year fixed-rate loans declined to an average 4.20 percent from 4.32 percent last week. That was still sharply higher than a 30-year rate that averaged 3.65 percent for all of 2016, the lowest level recorded from records going back to 1971. A year ago, the benchmark rate stood at 3.97 percent.

The average for a 15-year mortgage eased to 3.44 percent from 3.55 percent last week.

Mortgage rates surged in the weeks since the election of Donald Trump in early November. Investors in Treasury bonds bid yield rates higher because they believe the president-elect's plans for tax cuts and higher spending on roads, bridges and airports will drive up economic growth and inflation.