Priced out?

With rising interest rates and steeper home prices, does it really pay to go house hunting? Aren’t many people now priced out of the market?

As a borrower, your goal is to find the cheapest financing you can get, not only because of smaller cost but because less expensive mortgages will allow you to borrow more if you want.

It’s true as of this writing that mortgage rates are up relative to, say, last summer. That’s the headline, but the details might surprise a lot of borrowers.

Let’s start with perspective. Today’s rates — even if “higher” than rates in the recent past — are ridiculously low.

Lawrence Yun, chief economist with the National Association of Realtors, says mortgage rates in the 1970s “averaged 8.9 percent; in the 1980s, 12.7 percent; in the 1990s, 8.1 percent; and in the first decade of the new century they came in at 6.3 percent. The in-and-around 4 percent rate is only a recent phenomenon from the year 2011 to today.”

While perspective is nice, as a borrower you don’t really care how much parents and grandparents may have paid to borrow mortgage money. Your concern is here and now.

According to Freddie Mac, the price for a 30-year, fixed-rate, prime mortgage was 4.19 percent during the last full week in January. That compares with 3.79 percent a year earlier. If you borrow $125,000 the monthly cost for principal and interest is $581.74 at 3.79 percent versus $610.54 at 4.19 percent. That’s an increase of $28.80 a month or $346 a year.

Is such a hike in monthly costs enough to force some borrowers out of the marketplace? For a small number of borrowers, yes. For a lot of people? Probably not.

The individuals most likely to be impacted by the rate increase are marginal borrowers that no longer qualify for as much funding as they would like. However, while they may not have as much financing power as before, borrowers still have an ability to get financing. At 4.19 percent and with a $581.74 monthly payment for principal and interest, a qualified borrower can get financing for roughly $119,000.

The problem going forward is that rates may increase further, thus impacting more borrowers. For instance, NAR predicts that in 2017 “mortgage rates are expected to reach around 4.6 percent.”

We’ll see. However, while the Fed effectively sets bank rates it does not control mortgage pricing. Right now the supply of cash is overwhelming — some $50 trillion in cash is said to be available worldwide. It’s entirely possible that the Fed increases bank rates this year while at the same time mortgage costs actually fall – this is largely what we saw during the first half of 2016.