Buyers Beware: Mortgage Rates May Surge if Gov't Defaults

October 16, 2013

The clock is ticking for lawmakers to prevent the debt ceiling breach or the government could default on its debts. If the government does default, there likely be one consequence for home buyers that will soon emerge: skyrocketing borrowing costs. 

"Anytime there is a default, the borrower is going to get punished in terms of higher interest rates; if the government defaults, that means Treasury rates will also rise, and that also pushes up mortgage rates,” Lawrence Yun, chief economist for the National Association of REALTORS®, told Fox Business Network. “The housing market is highly sensitive to changes in interest rates.”

Home buyers may not be aware that there is a strong link between the government default and mortgage rates. 

The average rate on a 30-year fixed-rate mortgages was 4.23 percent last week, Freddie Mac reported. 

However, if the government defaults, mortgage rates could rise overnight by a full percentage point or more, says Anthony Hsieh, founder and CEO of LoanDepot, an online mortgage lender. Stu Feldstein, president of SMR Research, a mortgage research firm, predicts mortgage rates could rise by as much as two percentage points within a day or so. 

Hsieh believes the rise in rates would prompt more buyers to consider adjustable rate mortgages. 

"In the last three years or so, consumers have been spoiled with rates in the high threes to the mid-to-low fours,” Hsieh says. “If we climb into the 5 percent interest rate range, that will create psychological barriers and adjustable rate mortgages will become attractive -- even if they aren't."

Higher mortgage rates could make a big difference to buyers’ with their monthly payments. For example, a 30-year fixed-rate mortgage for a $300,000 loan could have about a $1,472 a month payment at a 4.23 percent mortgage rate. But if mortgage rates rise to 5.5 percent, that same mortgage would have about a $1,703 monthly payment and $83,160 extra in interest over the life of the loan. 

Source: “Could Government Default Send Homebuyers Racing to ARMs?” FOX Business (Oct. 15, 2013) and “Mortgage Rates Could Spike if U.S. Defaults,” The Wall Street Journal (Oct. 16, 2013)

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