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What you should do about exploding mortgage rates

Ethan Wolff-Mann
Senior Writer
A for-sale sign hangs outside a Florida house. Source: AP

In the past week, mortgage rates spiked 6.6%, now averaging 4.02% for a 30-year fixed-rate, up from 3.77% before the election.

According to David H. Stevens, president and CEO of the Mortgage Bankers Association, it’s the biggest week-over-week increase since the “taper tantrum” in June 2015. “Investor expectations of faster growth and higher inflation are driving the jump up in rates,” he said in a press release. “[It’s] spurring a commensurate drop in refinance activity.”

Not only are people wary of refinancing amid higher rates, regular mortgage applications have taken a hit as well. In the past week, the MBA noted a massive 9.2% drop week over week, seasonally adjusted.

It’s not a secret why. Donald Trump’s election a week ago tanked the bond market and sent rates through the roof—and mortgage rates followed. Now consumers face a tough question: Do I wait this out or not?

As Mortgage News Daily noted, many people assumed the increase was a reflex to a crazy election news cycle that wouldn’t last the long weekend, just like how the Dow’s massive losses during election night were erased by morning`—and continued rallying for the week following.

But no one really needs to freak out, according to Keith Gumbinger, vice president of mortgage data site HSH.com.

“In reality, [applications] have been on a downtrend since June/July,” he told Yahoo Finance in an email. Since the summer, rates had already been firming in anticipation to moves by the Fed—the election has just gave them a push.

Still, not everyone will run from refinancing, says Gumbinger, since 4% isn’t actually that high when you take a step back—plenty of people with 5.25% loans will still prefer saving 1.25% through refinancing. “However, homeowners who need or needed a rate close to 3.5% to make their opportunity to refinance worthwhile are simply going to remain on the sidelines.”

Again, a 4% mortgage rate is not “high” in relative terms. APR for a 30-year mortgage was around 4.5% in January 2014, and 6.6% just before the financial crisis in 2007. And if you go back to 1981, it was 18%. “Present levels are certainly higher than those seen over the summer, but aren’t high by any historical stretch of the imagination,” Gumbinger says.

Rates are also just one part of the puzzle. “It is a key to how much mortgage a borrower can carry, but the 0.25% to 0.375% rise in rates isn’t enough to change the equation greatly,” says Gumbinger. “After all, the difference in monthly payments on a $200,000 loan with a rate of 3.75% compared with 4% is just $29 per month.” Not necessarily enough to meaningfully throw a homebuyer’s plans off the rails.

“More important than rate is the ability of a wannabe homebuyer to be able to find a property they love in a place they want to live with a price they can afford,” says Gumbinger.

Besides the uncertainty about the election and the Fed’s expected move on interest rates, Gumbinger muses that the decline in mortgage applications could be from the fact that the market is sliding into the beginning of the holiday season, a quiet time on the calendar: “The rise in rates in the last week may simply be enough to start the quiet a little earlier than usual this year.”

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumerism, tech, and personal finance. Follow him on Twitter @ewolffmann.

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