If you’re looking to purchase a home in the state of Florida, one of the first things you’re probably going to look at is the cost of a mortgage. Of course, one of the biggest factors in determining the cost of a mortgage is the interest rate being charged by the bank. That interest rate, however, is dependent on a lot of factors.
What Determines Interest Rates in Florida?
During the last real estate boom, banks began to offer a number of so-called “exotic” loan products to customers throughout Florida. While nearly everyone is familiar with a traditional mortgage in which the interest rate remains the same over the life of the loan, Adjustable Rate Mortgages or ARMs became very popular among investors who were not looking to hold on to property for a long period of time. ARMs offer a low fixed interest rate for an introductory period, then allow the interest rate to adjust to market conditions.
While these loans fell out of favor for a short time after the real estate bust, they have started to gain in popularity again. Currently in Florida, a 5/1 ARM offers an average rate of 3.15%. While this is relatively low compared to historic rates in Florida, it’s between the current average 30-year fixed rate of 3.56% and the 15 year rate of 2.78%.
While shorter mortgages have almost always come with smaller interest rates, it’s a bit surprising that ARMs cannot beat the rates offered by fixed rate loans. It’s important to note, however, that ARMs tend to be the mortgages chosen by real estate investors. These tend to pose more risk to banks, since investors are more apt to dump a property that is not making money.
It’s important to note, however, that these rates are only the average rates offered by banks for homes in Florida. Companies such as AmeriSave are offering rates for 30 year fixed mortgages for 3.92%. Average rates for the entire state as of February 16th hovered around 4.04%. This number includes rates for refinancing, home equity loans, and other exotic loan products.
Over the past year, 30-year fixed rate mortgages have fluctuated between 3.625% and 4.25%. Within the past six months, however, rates have steadily decreased to a low of 3.65%. Similar trends have been noted for 15-year fixed mortgages which have fluctuated between 3.11% and 2.875%.
Not only are these some of the lowest interest rates offered over the past year, they are also some of the lowest interest rates offered over in nearly a decade. Domestically, interest rates are at an all-time low, allowing banks to offer some of their lowest mortgage rates ever. Qualifying for these mortgages, especially in Florida, can be tricky, however. Many banks have severely tightened their lending restrictions, especially on homeowners who are looking to purchase a second or third property in the state of Florida. Because of volatile market conditions and the threat of hurricanes, many banks are warning potential homebuyers that applications for multiple mortgages will be highly scrutinized.
Where Are Interest Rates in Florida Going?
Over the past six months interest rates have seen a decline, despite the predictions of many economists who assumed that an increase in federal interest rates would force banks to increase their mortgage rates. Instead, extreme volatility in foreign markets caused the Federal Reserve to halt their plan to increase interest rates, allowing banks to continue to borrow money at low rates.
These low mortgage rates combined with an increased demand for property throughout Florida have created a market in which real estate prices are rising but consumers are paying less for their mortgages. The low rates are obviously encouraging further investment in real estate, but increased restrictions on lending and credit have made it much more difficult to qualify for mortgages.
So far this year, the Federal Reserve has shown a reluctance to increase their rates, citing volatility in markets in China and Brazil and dramatically decreasing oil prices. These factors have made future economic conditions hard to predict, leading many economists to state that they believe mortgage rates will continue to remain at all-time lows for the foreseeable future.
The increased demand for property and mortgages throughout Florida, however, may cause some banks to attempt to raise their interest rates. This is already being seen in the rates offered on 5/1 ARMs, which are averaging 25 to 150 points higher than rates being offered on 15 year loans. Because ARMs are often favored by higher-risk real estate investors, where as 15 year mortgages tend to be favored by owner-occupiers, the higher interest rates offered by ARMs can be explained more by the increased risk to the bank than it can be by factors in the market.
If market conditions stabilize, it is possible that the Federal Reserve will resume their plan to gradually increase interest rates. At the present time, however, there are no indications that this will occur. China’s economy is heavily dependent on foreign export, and the world has not seen such a dramatic fall in oil prices in decades. The long-term effects of these two factors are next to impossible to predict. This will most likely lead to many regulators wanting to leave interest rates alone while the market stabilizes on its own. That means mortgage interest rates will most likely remain low throughout 2016.
2 Point Highlight
1. Over the past six months interest rates have seen a decline, despite the predictions of many economists who assumed that an increase in federal interest rates would force banks to increase their mortgage rates.
2. These low mortgage rates combined with an increased demand for property throughout Florida have created a market in which real estate prices are rising but consumers are paying less for their mortgages.
