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Mortgage Rates Are Increasing: What Does This Mean For Homebuyers?
Rising mortgage rates create a new hurdle for homebuyers, who are already dealing with inventory shortages and a competitive housing market, to overcome.
By: Catie Kovelman, Updated 02/28/2022
As homeowners or soon-to-be homebuyers, it’s important to keep tabs on the highs and lows in the constantly shifting real estate market. And the latest “high” for potential homebuyers to look out for is rising mortgage rates. At the time of this writing, the interest rate for 30-year fixed mortgages has jumped up to 4.19%, while the interest rate for 15-year fixed mortgages has risen to 3.44%. Interest rates for 5/1 ARMs and jumbo loans have also increased to 2.93% and 4.19% respectively. For context, mortgage rates this high have not been seen since May of 2019 before the COVID-19 pandemic began.
While predictions about the housing market can’t be guaranteed, experts do expect mortgage rates to continue to rise. As our country got a handle on the COVID-19 pandemic and we returned to a new normal, the economy has improved significantly. High consumer spending and inflationary pressure have been driving up mortgage rates in February, and will likely continue to do so into March.
In addition, the Federal Reserve had been aggressively purchasing assets, including mortgage-backed securities, to help the economy in the wake of the pandemic. But now, the Federal Reserve has just announced it will begin tapering these purchases at twice the rate it initially planned to do so, which is also causing mortgage rates to rise. And in response to higher inflation and a stronger employment market, the Federal Reserve is expected to begin a series of increases in its benchmark interest rate in March, indirectly helping to push up mortgage rates.
While increasing mortgage rates might not be the news you were hoping for if you were planning to buy a home or refinance your mortgage in the near future, it’s important information to have, especially since mortgage rates are expected to continue to increase for the foreseeable future. During the pandemic, mortgage rates were slashed to unprecedented, historic all-time lows to help homebuyers while the economy was struggling. Of course, we knew those rates wouldn’t be around forever. For potential homebuyers, and especially those hunting for their first house, mortgage rates can determine what you can or can’t afford. A higher mortgage equates to larger monthly payments and more interest. If buying a house is already a bit of a financial stretch for you, you may have been relying on lower rates to help your budget stretch a bit farther or to provide some peace of mind.
But even with rising mortgage rates, there is still high demand in the real estate market and a housing inventory shortage to contend with. While this hasn’t happened just yet, as mortgage rates continue to rise there is a chance that demand for new homes will go down due to affordability issues. Ultimately, this rise in mortgage rates may cause the annual increase in home pricing to slow significantly, or even cause prices to drop in some locations. Some homebuyers, such as first-time homebuyers, might have the best luck if they wait for increasing mortgage rates to cool off housing prices later in the year.
So, what do you do with this information if you are looking to buy a new home this year? The best course of action is to consult with a knowledgeable real estate agent and a mortgage broker to come up with the best strategy for your home search. Is it better to find a home with a new sense of urgency before mortgage rates rise more, or hold off until housing prices cool off a bit? In addition, mortgage brokers can pre-approve you for a loan and help you confirm what you really can afford. When you eventually submit an offer, your loan pre-approval will help sellers see you as a responsible and trustworthy buyer.
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