Will Mortgage Rates Increase?
The Fed just increased the discount rate for the first time in years. It is the baseline rate for all lending in the economy, and some expect mortgage rates to increase measurably.
A 2% move upward in your mortgage rate can create a 10-20% increase in monthly payments, depending on loan size. Assuming your income remains constant, your debt to income ratios will increase, and it will affect your rent vs. buy calculation.
How much this means to you personally depends on your financial situation. If your debt-to-income ratio is in the 28-30% range, rate increases may push you out of favor with co-op boards in your price range. Similarly, you may find that rentals in your neighborhood become comparatively attractive given the increase in ownership payments.
If rates go up, should we expect purchase demand to go down, and prices to flatten out or go down? Not necessarily.
In New York, there are many more cash buyers and buyers with excess wealth than other locations, meaning demand can resist a mortgage-rate impact.
Also, the number of homes for sale in Manhattan has been near all-time lows for 24-36 months, so (no) supply could balance lower demand.
Prices have increased over the past four years, and may continue to rise. Delaying a purchase decision on account of rates alone may find you spending more a few years down the road, having effectively the same impact on your budget, or worse.
A solution to buying in an increasing rate environment, where prices are also increasing, is to finance with a 5/1, 7/1 or 10/1 ARM, locking in a lower rate than 30-fixed, while assuming some future risk. If you plan to move within 5, 7, or 10 years, it can be a good move.