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Mortgage Rates are Up: What Does This Mean for Homebuyers?

If you’ve been in the market for a home in the past year you know that mortgage rates have climbed quickly in recent months. Average mortgage rates for 30-year fixed-rate loans were under 3% for much of 2021, according to data from Freddie Mac. By mid-April 2022 rates climbed above 5%.

If you’re a homeowner with a fixed-rate loan and no plans to move, higher mortgage rates won’t impact you. But if you are in the market to buy a home, higher interest rates may have a bigger effect on your finances.

Now for some good news: the Mortgage Bankers Association forecasts that average rates for a 30-year fixed-rate loan will be 5.1% during the third quarter of this year and will stay at 5% for the following three quarters before dropping to 4.8% during the third and fourth quarters of 2023. Stabilized mortgage rates allow everyone to adjust without worrying about future spikes.

The Fed, mortgage rates and the housing market

The Federal Reserve agency doesn’t control mortgage rates, but when the Fed raises the short-term Federal Funds rate, it influences multiple economic factors and typically means that mortgage rates rise, too.

The Fed has raised its rates several times this year in an effort to control inflation. Higher interest rates make borrowing more expensive, which in turns slows demand for credit.

Generally, when mortgage rates are low, that heats up the housing market and fuels demand. Higher demand pushes home prices higher. When mortgage rates are higher, that can slow down the housing market.

Today, there are some signs that homebuyers are pulling back a little. However, the U.S. has a dramatic housing shortage – nearly six million more homes are needed by Realtor.com’s recent estimate - and demand continues to be high, particularly among millennials who are in their peak homebuying years.

Monthly payments and mortgage rates

Average mortgage rates provide an indication of the direction rates are headed, but the rates homebuyers pay depend on numerous factors including your credit history, the type of loan you choose, the term of your loan, the size of your down payment and even the type of property you buy.

The impact of the swift increase in mortgage rates in 2022 has meant that borrowers are now paying several hundred dollars more per month in interest compared to late 2021 for the same size loan.

For example, if you purchased a $450,000 house with a 20% down payment with a 30-year fixed-rate loan at 3%, your monthly payment for principal and interest would be $1,517. That same loan would cost $2,044 ($527 more per month) at an interest rate of 5.5%.

Homebuyers, sellers and higher rates

While higher mortgage rates and bigger monthly payments are not great news, buyers may benefit from less competition if some other prospective homebuyers drop out of the market. Even in markets that continue to have bidding wars, buyers often face just one or two other offers rather than dozens. Homebuyer competition hit its lowest level in a year in April 2022, according to Redfin real estate brokerage, but 61% of buyers still encountered a bidding war.

Some options that may help you overcome the challenges of competition and higher rates:

  • Discuss your mortgage options in depth with a lender. A bigger down payment, paying extra cash at the closing to buy down your mortgage rate or even an adjustable-rate mortgage might be a good financial choice for you depending on your individual circumstances.
  • Expand your home search. Consider a fixer-upper that you can gradually improve, look for a smaller home or widen your geographic area to find more affordable options.
  • Tap into your current home equity. Talk to Revive about making a cash offer now to beat the competition, move into your new home and sell your home later so you don’t have to move twice.

If you’re a homeowner, consider the benefits of renovating your home before selling. As competition slows, it’s more important than ever to get your home in the best possible condition before you sell. Buyers who stretch to buy a home when rates and prices are high are less likely to want to do renovations themselves, so you’ll see faster and get better offers when your home is move-in ready.

written with intention by
Brittany Zamora
Underwriter