Should the Market Fear a 6% Jump in Rates?

The Federal Reserve's choice today could possibly close a near a seven-year streak of low mortgage rates. This is what an increase in rates could mean for the housing market.

"The potential move away from zero interest rate policy, for short-term rates, is a harbinger of higher mortgage rates ahead and the beginning of the end of this seven-year era of incredibly low mortgage rates and corresponding high affordability," says Jonathan Smoke, realtor.com®'s chief economist.  

A few financial experts are foreseeing a potential increase of 50 basis points throughout the following 12 months in mortgage rates. Smoke says that home loan rates that raise to 6 percent could have a major effect to what borrowers pay on their monthly mortgage.

For instance, in May, the average loan with a 30-year fixed-rate mortgage was $231,000 at a 4.03 percent average rate, which carried a monthly payment (principal and interest) of $1,107. However, that same loan amount at a 4.53 percent interest rate would jump the monthly payment to $1,175 – a 6 percent increase, according to realtor.com®'s analysis. 

In addition, realtor.com® predicts that higher rates will will prompt as much as a 7 percent rejection in mortgage applications. "Based on analysis of loan-level ratios for a large sample of loans approved in the first half of this year, as much as 7 percent of mortgage applications would have failed to get approval as a result of higher debt-to-income ratios caused by higher rates," Smoke says. 

First-time home purchasers may be especially hard-hit, and in addition high-cost zones.

"High cost markets and markets where first-time buyers have been just barely able to qualify this year are most at risk of seeing more failed mortgage applications as a result of higher debt burdens triggered by higher rates," Smoke says.

The markets that could see the most impact (those with 10 percent or more by percentage of potential failed mortgage applications) include:

•Honolulu: 14 percent

•Stockton, Calif.: 12 percent

•Fresno, Calif.: 12 percent

•El Paso, Texas: 11 percent

•Fort Pierce, Fla.: 11 percent

•San Diego: 11 percent

•Visalia, Calif.: 11 percent

•Chattanooga, Tenn.: 10 percent

•Los Angeles: 10 percent

•Miami: 10 percent

•Modesto, Calif.: 10 percent

•Reno, Nev.: 10 percent

•Sacramento: 10 perce