By TARA SIEGEL BERNARD

New York Times News Service
August 17, 2008

    If you are a prospective home buyer waiting for the bottom of the housing market, there is another fact you need to take into account: mortgage rates are rising.

    Rates on a 30-year fixed-rate loan, which were as low as 5.89 percent in mid-April, have been climbing and now remain near a one-year high of about 6.7 percent, according to the financial publisher HSH Associates.

    The financial troubles at Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies, are one factor behind the increasing rates. The two companies continue to reduce the number of mortgages they buy from lenders and have also imposed new fees on the loans they do buy and guarantee, a cost that ultimately is passed on to borrowers.

    At the same time, mortgage bond investors want to be paid more to make up for the risk that borrowers may default on their loans.

    So the question is whether higher mortgage rates will offset slumping home prices, and crimp buyers’ purchasing power. Or, to put it another way, is it better to jump into the market now before it hits bottom?

    The answer depends on where you live. In some parts of the country where prices may fall much further, it could pay to hold off even if mortgage rates do continue to rise. But in places where houses no longer look so overvalued, like San Francisco, it may be tempting to start testing the waters.

    “You might find more desperate sellers because rates have gone up,” said Keith T. Gumbinger, vice president of HSH Associates in Pompton Plains, N.J. “When rates go up and that impacts affordability, it tends to pressure prices downward even further.”

    Economists at Moody’s Economy.com expect the average 30-year fixed rate to increase to 7.01 percent by the end of next June and home prices over all to drop about 9 percent more over the same period. If everything follows their model, the economists say property values should bottom out by mid-2009.

    Using those projections, Celia Chen, director of housing economics at Economy.com, did some calculations on the impact of rising interest rates on a potential home buyer’s budget.

    Take, for instance, a couple who buy a $500,000 home and make a down payment of 20 percent, or $100,000. With a 6.43 percent interest rate on a 30-year fixed loan, their monthly payment would be $2,510. Over the 30-year life of the mortgage, they would pay a total of about $1 million for the home, including the down payment.

    But what if that couple had waited and the home price dropped 9 percent to $455,000 but mortgage rates rose to 7.01 percent? Now, the 20 percent down payment would be $91,000, and the monthly payments $2,424. The buyers would end up paying a total of about $964,000 for the house, or nearly 4 percent less. If the buyers were able to refinance to a lower rate a few years later, the total cost could be even lower.

    The calculations change, however, when mortgage rates go even higher. Once the rates move above 7.36 percent, they begin to lose the benefits of the 9 percent drop in the house price.

    If you are looking for an apartment in Manhattan, where prices are near their highs and are not expected to fall as much has they have elsewhere, the rise in mortgage rates quickly starts to affect how much you can afford. A $500,000 apartment (which could be a studio, since this is Manhattan we’re talking about) with a $100,000 down payment at a 7.01 percent rate means your monthly payments would be nearly $2,664. The total cost of the property, including down payment, would be $1.06 million.

    “Prices have come down quite a bit since the top of the market, and home values are better than they were a year ago,” Ms. Chen said. “But I am still cautioning to wait and see how much further prices will fall, particularly in regions that were most overblown during the housing boom. If you’re looking for bargain basement prices, I don’t think we’re there yet.”

    Mortgage rates, on the other hand, may be even less predictable. For all we know, “they might go down next week or the week after,” she added. “In the longer term, rates are still relatively attractive to where we think they might be next year.”

    That is why it may be wise for homeowners looking to refinance out of, say, an adjustable-rate mortgage, to lock in a rate now. If your house drops in value, and rates continue to balloon, you may be out of luck.

    “There is a real risk to sitting back in hopes that mortgage rates decline to make for a more attractive refinancing,” said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site based in North Palm Beach, Fla. “You could win the battle but lose the war if a further decline in your home price keeps you from qualifying.”

    There is one more thing to keep in mind as you shop around for mortgages. Lenders are demanding ever-higher credit scores to qualify for the best price on loans.

    Mr. McBride said credit scores, also known as FICO scores, which are calculated by the company Fair Isaac, now need to be at least 720 to secure the best mortgage rates. “Nine months ago, 680 was the line of demarcation,” Mr. McBride said. “Now, you can get a loan at 680, but the rate will be higher.” The difference could be a quarter to a half of a percentage point more than someone with a 720.

    “Even though mortgage money is somewhat more expensive and loan availability continues to be impaired, if you have a good credit score, a down payment, are able to document your income, and assets and debts aren’t too out of line with your income, the mortgage market is still open to you,” Mr. Gumbinger of HSH said. “But the price of that credit is somewhat less acceptable.”

CREDIT SCORES MATTER

There is one more thing to keep in mind as you shop around for mortgages. Lenders are demanding ever-higher credit scores to qualify for the best price on loans. FICO scores now need to be at least 720 to secure the best mortgage rates.