Where Mortgage Rates Are Headed
Mortgage experts see rates rising as the Fed continues to fight inflation, but the question is how much.
The inflation beast has not yet been slain, says Jeff Lazerson of Mortgage Grader. Higher mortgage rates slow down the beast.
Derek Egeberg of Academy Mortgage in Yuma, Arizona, agrees. Until you see relief from rising prices, you will not see relief from rising interest rates.
As mortgage rates hover near the 7 percent barrier, competition among homebuyers could ease further, though the jump in rates is also squeezing affordability.
The national median family income for 2022 is $90,000, according to the U.S. Department of Housing and Urban Development, and the median price of an existing home sold in October was $379,100, according to the National Association of Realtors. Based on a 20 percent down payment and a mortgage rate of 6.78 percent, the monthly payment of $1,973 amounts to 26 percent of the typical familys monthly income. A year ago, median family income was $79,900, the median home price was $364,600 and the average mortgage rate was 3.13 percent. Buying the typical home then required just 19 percent of a familys monthly income.
How Your Mortgage Interest Rate Is Determined
Mortgage and refinance rates vary a lot depending on each borrowers unique situation.
Factors that determine your mortgage interest rate include:
- Overall strength of the economy A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
- Lender capacity When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
- Property type A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
- Loan-to-value ratio Your loan-to-value ratio compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
- Debt-To-Income ratio This number compares your total monthly debts to your pre-tax income. The more debt you currently have, the less room youll have in your budget for a mortgage payment
- Loan term Loans with a shorter term typically have lower rates than a 30-year loan term
- Borrowers credit score Typically the higher your credit score is, the lower your mortgage rate, and vice-versa
- Mortgage discount points Borrowers have the option to buy discount points or mortgage points at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
How Much Can I Borrow For A Mortgage
The amount of money you can borrow is affected by the property, type of loan, and your personal financial situation.
During the mortgage preapproval process, the lender will look at your overall financial profile to determine how much it will lend to you. A big factor in this process is your debt-to-income ratio . Your DTI is calculated by dividing your total monthly debt payments by your monthly income. In most cases, the maximum DTI is typically 43%. So if you make $5,000 a month, your mortgage payment and other monthly debt payments cant exceed $2,150.
To protect its investment, a lender will typically only let you borrow a certain percentage of a propertys value. So the value of the property can also limit how much you can borrow. Most mortgage loans require a down payment of anywhere from 3% to 20%. You may be able to borrow 100% of the propertys value with certain government-backed loans, like Department of Veterans Affairs Loans or U.S. Department of Agriculture Rural Development loans.
Recommended Reading: What Would The Repayments Be On A 100k Mortgage
Powell: Housing Market Has ‘weakened Significantly’
The experts’ commentary comes as the Fed hiked its benchmark rate by 75 basis points for the fourth straight time. As a result, “activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates,” Powell said during a press conference last week.
Powell furthered the Fed’s stance that mortgage rates were actually lowering home prices in certain markets without mentioning specifics. However, George Ratiu, manager of economic research for Realtor.com, tells USA TODAY that some of its top 50 market cities including New Orleans, Pittsburgh and Birmingham, Ala., are seeing home price declines.
“What this tells me is that demand has pulled back really sharply,” Ratiu said. “As a result, we are seeing inventory continue to slightly grow as more homes are sitting on the market longer.”
Annual home price growth is expected to slow to 10% by December, half of the peak 20% spike recorded in April, according to the latest CoreLogics Home Price Index forecast.
And investment firms Goldman Sachs, Moody’s Analytics and Morgan Stanley have said they expect home prices to drop between 5% and 10% in the next year.
“The housing market was very overheated for the couple of years after the pandemic as demand increased and rates were low,” Powell told reporters last week. “We all know the stories of how overheated the housing market was, prices going up. Many, many bidders and no conditions, that kind of thing.
Why Does My Mortgage Interest Rate Matter
Your mortgage interest rate impacts the amount youll pay monthly as well as the total interest costs youll pay over the life of your loan. While it may not seem like a lot, a lower interest rate even by half of a percent can add up to significant savings for you.
For example, say a borrower with a good credit score and a 20 percent down payment takes out a 30-year fixed-rate loan for $300,000. In this case, an interest rate of 4.75% instead of 5.25% translates to more than $90 per month in savings in the first five years, thats a savings of $5,500.
Its equally important to look at the total interest cost of your loan. In the same scenario, a half percent decrease in interest rate means a savings of almost $33,000 in total interest owed over the life of the loan.
Also Check: What Is The Average Mortgage Rate In Florida
Is A Recession Coming
Its certainly possible. Many banks, experts, and lenders are noting that certain trends lead them to believe that a recession is inevitable. Luckily, recessions tend to be shorter periods of time, so even if one does happen, there are ways to combat it and still work towards financial goals, like getting a house.
Related: What to Do With Your Money in a Recession
Why Are Interest Rates Going Up
Interest rates are going up because the economy is starting to have a more positive outlook on post-COVID recovery.
Coronavirus has been the major force keeping mortgage rates low over the past year. The closer we get to widespread vaccination and the better our economic outlook as a result the higher rates will go.
Although the U.S. is still at a critical stage with the virus, were finally starting to see a path forward with the widespread rollout of vaccines and the passage of a $1.9 trillion relief bill championed by the Biden Administration.
The coronavirus relief bill and interest rates
The aim of the new coronavirus relief bill dubbed the American Rescue Plan is to ease the countrys economic burden and spur spending and growth.
Economic growth would likely raise mortgage rates as different sectors rebound.
A stronger economy means investors are willing to take bigger risks with their investments. This moves money out of safe mortgage-backed securities and into different financial vehicles thus pushing mortgage rates up.
Mortgage Professional America Magazine also reported that stimulus spending could increase inflation, which would drive up mortgage rates as well.
Keeping an eye on the 10-Year Treasury bond yields
Eli Sklar, senior loan consultant with loanDepot, pointed to the 10-Year Treasury yield as an indicator of an improving economy and a signal that rates will rise in the coming year.
Recommended Reading: How Many Points Should I Buy On My Mortgage
Are Rising Interest Rates Good For Mortgage Companies
Yes, rising interest rates are good for companies that lend out money for home purchases. The higher the interest rate, the more a mortgage company/bank earns interest. This results in more revenues for the bank. Conversely, if interest rates are too high, resulting in a significant drop in the demand for mortgages, then mortgage companies can be hurt due to a lack of business.
Mortgage Interest Rates Dip Not ‘likely Until 2024’
Powell’s sentiments were echoed by Federal Reserve Board Vice Chair Lael Brainard in the Fed’s latest financial stability report.
“Today’s environment of rapid synchronous monetary policy tightening, elevated inflation, and high uncertainty associated with the global pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance, due to strained liquidity in core financial markets or hidden leverage,” Brainard said.
As a result of the Fed’s hikes, real estate markets already impacted by higher mortgage interest rates for several months will unlikely see relief, said Ruben Gonzalez, chief economist at Keller Williams, a property tech real estate company.
“As the Fed continues to combat inflation, the housing market will continue to slow as one of the most interest rate-sensitive industries. Homeowners equity levels are high because of the rapid appreciation, and mortgage default rates remain near all-time lows as markets cool,” Gonzalez said. “We’re unlikely to see mortgage rates move down until the second half of next year but more likely not until 2024.”
Andrzej Skiba, head of U.S. Fixed Income at RBC Global Asset Management, said Powell exhibited a “hawkish” stance that makes him think the Fed believes “it is very premature” to think about pausing rates.
“So the Fed cavalry might not be coming to the rescue in 2023,” Skiba said. “It comes as no surprise.”
You May Like: How Much Is A 180k Mortgage Per Month
When To Lock Your Mortgage Rate
Keep an eye on daily rate changes. But if you get a good mortgage rate quote today, dont hesitate to lock it in.
Remember that average mortgage rates are only a general benchmark. If you have good credit and strong personal finances, theres a good chance youll get a lower rate than what you see in the news. So check with a lender to see what you qualify for.
Mortgage Rates Fall For First Time In Months
Mortgage rates dipped slightly last week for the first time in more than two months amid the Federal Reserves ongoing fight with inflation, according to data released Wednesday by the Mortgage Bankers Association .
The MBAs weekly survey shows the 30-year fixed-rate mortgage rate falling to 7.06 percent, down from 7.16 a week earlier, and applications decreasing for the sixth straight week. Rates, however, remained near the highest level in two decades.
The share of adjustable-rate mortgages, which rose recently as mortgage rates surged, declined from the previous week to 11.8 percent of total applications.
Despite the small drop in the 30-year fixed rate, mortgage rates are significantly higher than last year and continue to challenge buyers and the housing market overall.
Apart from the ARM loan rate, rates for all other loan types were more than three percentage points higher than they were a year ago, Joel Kan, the MBAs vice president and deputy chief economist, said in a statement.
These elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales, Kan added.
Meanwhile, the share of refinance activity stayed low as homeowners remained hesitant to risk losing their low rates.
Read Also: Does Rocket Mortgage Report To Credit Bureaus
Rising Interest Rates And Homebuyers
In the real estate business, conventional wisdom says that rising interest rates make buying or selling a home more difficult, and decreasing interest rates make buying and selling easier.
For example, if Johnny Home Buyer wants a 4% rate on a 30-year fixed mortgage on a home worth $400,000, his monthly mortgage payment would be $1,900. But if Johnny only qualified for a 5% rate on a 30-year fixed mortgage, his monthly payment would rise to $2,138. A 1% increase in interest raises Johnny’s payment by $238, or roughly 13%. So, what does this mean for homebuyers?
From a home buyer’s perspective, as mortgage rates increase, affordability decreases. In the aforementioned example, Johnny Home Buyer wants to qualify for a $400,000 mortgage at 4% interest, but at 5% interest, lenders can only offer Johnny a $355,000 loan based on his qualifications. A 1% increase in mortgage interest decreases Johnny’s purchasing power by $45,000.
Before the Great Recession, during the peak of the subprime mortgage madness, Johnny Home Buyer would’ve been able to “qualify” for that $400,000 mortgage he wanted.
But to sweeten the deal, a subprime lender would have offered Johnny a 2% adjustable interest rate for the first five years. After five years, however, Johnny is on the hook for at least 7% interest, maybe more if interest rates spike.
Higher Home Prices May Be Here To Stay
There has been a lot of speculation, but little evidence, about what higher rates tell us about home price appreciation. Our look at the historical evidence shows that sharply higher mortgage rates tend to slow home price appreciation and may weigh on housing market activity. But nominal home price appreciation does remain positive. And during these periods of sharp interest rate increases, we did not have the acute housing supply shortage we have today, which could slow the deceleration in home price appreciation. In short, despite a sharp drop in affordability because of higher mortgage rates, home prices are unlikely to decline. Rather, affordability challenges are likely to persist.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.
Read Also: What Are Home Mortgage Rates Right Now
Mortgage Rate Trends By Loan Type
Many mortgage shoppers dont realize there are different types of rates in todays mortgage market. But this knowledge can help home buyers and refinancing households find the best value for their situation.
Following are 3-month mortgage rate trends for the most popular types of home loans: conventional, FHA, VA, and jumbo.
Inflation And The Economy
As Helali explained, when spending stops, we enter a recession. When frantic spending occurs, with people willing to pay more than they usually would for goods and services, inflation can occur.
The real estate market has been hot, hot, hot with sellers holding the literal keys as buyers have scrambled to find inventory and compete against multiple offers in the hopes of a successful purchase. As the market is cooling, things are starting to level out for buyers, and part of this is due to increasing interest rates slowing down the bidding frenzy.
Don’t Miss: Can I Get A Mortgage On A Foreclosed Home
Todays Mortgage Rates And Your Monthly Payment
The rate on your mortgage can make a big difference in how much home you can afford and the size of your monthly payments.
If you bought a $250,000 home and made a 20% down payment $50,000 you would end up with a starting loan balance of $200,000. On a $200,000 home loan with a fixed rate for 30 years:
- At 3% interest rate = $843 in monthly payments
- At 4% interest rate = $955 in monthly payments
- At 6% interest rate = $1,199 in monthly payments
- At 8% interest rate = $1,468 in monthly payments
You can experiment with a mortgage calculator to find out how much a lower rate or other changes could impact what you pay. A home affordability calculator can also give you an estimate of the maximum loan amount you may qualify for based on your income, debt-to-income ratio, mortgage interest rate and other variables.
Other factors that determine how much you’ll pay each month include:
Loan Term:
Choosing a 15-year mortgage instead of a 30-year mortgage will increase monthly mortgage payments but reduce the amount of interest paid throughout the life of the loan.
Fixed vs. ARM:
The mortgage rates on adjustable-rate mortgages reset regularly and monthly payments change with it. With a fixed-rate loan payments remain the same throughout the life of the loan.
Taxes, HOA Fees, Insurance:
Homeowners’ insurance premiums, property taxes and homeowners association fees are often bundled into your monthly mortgage payment. Check with your real estate agent to get an estimate of these costs.
Bank Savings: Shop Around
If youve been stashing cash at big banks that have been paying next to nothing in interest for savings accounts and certificates of deposit, dont expect that to change much, McBride said.
Thanks to the big players paltry rates, the national average savings rate is still just 0.16%, up from 0.06% in January, according to Bankrate.coms October 26 weekly survey of large institutions.
But all those Fed rates hikes are starting to have a more significant impact at online banks and credit unions, McBride said. Theyre offering far higher rates with some topping 3% currently and have been increasing them as benchmark rates go higher.
As for certificates of deposit, theres been a noticeable increase in return. The average rate on a one-year credit union CD is 1.05% as of October27, up from 0.14% at the start of the year. But top-yielding one-year CDs now offer as much as 4%.
So shop around. If you make a switch to an online bank or credit union, however, be sure to only choose those that are federally insured.
Read Also: How Long Of A Mortgage Should I Get
What Happens To Mortgage Rates In A Recession: Now Is The Time To Buy
As you can see, buying a house during a recession can actually be a good idea. But, its important to remember that youll still want to keep up with your budget and have some money in savings. Its possible to get a home for a decent price and still meet your personal finance goals!
What do you think? Based on what happens to mortgage rates in a recession, would you buy a house??
