Interest rates for a 30-year fixed rate mortgage have climbed from 3.95% in the first week of January up to 4.61% last week, which marks a 7-year high according to Freddie Mac. The current pace of acceleration has been fueled by many factors.
Sam Khater, Freddie Mac’s Chief Economist, had this to say:
“Healthy consumer spending and higher commodity prices spooked bond markets and led to higher mortgage rates over the past week. Not only are buyers facing higher borrowing costs, gas prices are currently at four-year highs just as we enter the important peak home sales season.”
“Healthy consumer spending and higher commodity prices spooked bond markets and led to higher mortgage rates over the past week.
Not only are buyers facing higher borrowing costs, gas prices are currently at four-year highs just as we enter the important peak home sales season.”
Investopedia explains the relationship like this:
“The price of oil and inflation are often seen as being connected in a cause-and-effect relationship. As oil prices move up or down, inflation follows in the same direction.”
You may have noticed that filling your gas tank has become substantially more expensive in recent months. The average national gas price has climbed nearly $0.50 from the beginning of the year, leading to the highest price for Memorial Day weekend since 2014.
As rates go up, your purchasing power goes down, but don’t worry; rates are still well below the averages we’ve seen over the last four decades.
“Freddie Mac said this year’s higher rates have not yet caused much of a ripple in the strong demand levels for buying a home seen in most markets, but inflationary pressures and the prospect of rates approaching 5 percent could begin to hit the psyche of some prospective buyers.”
Buying sooner rather than later will help lock in a lower rate than waiting, as the experts believe rates will continue to climb. Even a small increase in interest rates can have a big impact on your monthly housing cost.
If you are planning on buying a home this year, keep an eye on gas prices the next time you’re at the pump. If you start to feel a big jump in price, know that rates are probably on their way up, too.
According to Freddie Mac’s latest Primary Mortgage Market Survey, interest rates for a 30-year fixed rate mortgage are currently at 4.61%, which is still near record lows in comparison to recent history!
The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.
Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows the impact that rising interest rates would have if you planned to purchase a home within the national median price range while keeping your principal and interest payments between $1,850-$1,900 a month.
With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be closer to 5% by this time next year.
Mortgage interest rates have risen by more than half of a point since the beginning of the year, and many assume that if mortgage rates rise, home values will fall. History, however, has shown this not to be true.
While rates have been rising, so have home values. Here are the most recent monthly price increases reported in the Home Price Insights Report from CoreLogic:
Not only did prices continue to appreciate, the level of appreciation accelerated over the first quarter. CoreLogic believes that home prices will increase by 5.2% over the next twelve months.
Freddie Mac explained in a recent Insight Report:
“In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”
If you are thinking about moving up to your dream home, waiting until later this year and hoping for prices to fall may not be a good strategy.
We recently shared that national home prices have increased by 6.7% year-over-year. Over that same time period, interest rates have remained historically low which has allowed many buyers to enter the market.
As a seller, you will likely be most concerned about ‘short-term price’ – where home values are headed over the next six months. As a buyer, however, you must not be concerned about price, but instead about the ‘long-term cost’ of the home.
The Mortgage Bankers Association (MBA), Freddie Mac, and Fannie Mae all project that mortgage interest rates will increase by this time next year. According to CoreLogic’s most recent Home Price Index Report, home prices will appreciate by 5.2% over the next 12 months.
If home prices appreciate by 5.2% over the next twelve months as predicted by CoreLogic, here is a simple demonstration of the impact that an increase in interest rate would have on the mortgage payment of a home selling for approximately $250,000 today:
If buying a home is in your plan for this year, doing it sooner rather than later could save you thousands of dollars over the terms of your loan.
Whether you are a buyer searching for your first home, or a homeowner looking to move up to your next home, you should pay attention to where mortgage interest rates are heading.
Over the course of 2018, according to Freddie Mac’s Primary Mortgage Market Survey, rates have increased from 3.95% in the first week of January to 4.40% in the first week of April.
At first glance, the difference between these numbers in such a short amount of time could be concerning, but if we look at the graph below, we’ll see that rates have already started to level off and return to the mark set in February.
This is great news for anyone looking to buy a home this spring! The spring is always one of the busiest seasons for home buying, and with rates increasing even more, buyers have come off the fence to lock in great rates! This is still great advice as the experts believe that rates will continue to rise throughout the year.
Every month, Freddie Mac, Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors release their projections for where they believe mortgage rates will be in the coming months. If we take the average of what each of the four organizations is predicting for the second quarter, rates are expected to rise to about 4.48% by June.
Waiting until the end of the year to buy, with rates still projected to increase, will end up costing you more money on your monthly mortgage payment. For every $250,000 you need to borrow to purchase your dream home, you will spend $49.21 more per month, $590.52 per year, and over $17,700 by the end of your 30-year mortgage.
And that’s just the impact of your interest rate going up!
If you are ready and willing to purchase a home, find out if you’re able to. Let’s get together to evaluate your needs and help you with next steps!
Interest rates hovered around 4% for the majority of 2017, which gave many buyers relief from rising home prices and helped with affordability. In the first quarter of 2018, rates have increased from 3.95% up to 4.45% and experts predict that rates will increase even more by the end of the year.
The rate you secure greatly impacts your monthly mortgage payment and the amount you will ultimately pay for your home. Don’t let the prediction that rates will increase stop you from purchasing your dream home this year.
Be thankful that you can still get a better interest rate than your older brother or sister did ten years ago, a lower rate than your parents did twenty years ago, and a better rate than your grandparents did forty years ago.
Recently, Freddie Mac published an Insight Report titled Nowhere to go but up? How increasing mortgage rates could affect housing. The report focused on the impact the projected rise in mortgage rates might have on the housing market this year.
Many believe that an increase in mortgage rates will cause a slowdown in purchases which would, in turn, lead to a fall in house values. Ultimately, however, prices are determined by supply and demand and while rising mortgage rates may slow demand, they also affect supply. From the report:
“For current homeowners, the decision to buy a new home is typically linked to their decision to sell their current home… Because of this link, the financing costs of the existing mortgage are part of the homeowner’s decision of whether and when to move. Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home. Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing.”
“For current homeowners, the decision to buy a new home is typically linked to their decision to sell their current home… Because of this link, the financing costs of the existing mortgage are part of the homeowner’s decision of whether and when to move.
Once financing costs for a new mortgage rise above the rate borrowers are paying for their current mortgage, borrowers would have to give up below-market financing to sell their home.
Instead, they may choose to delay both the sale of their existing home and the purchase of a new home to maintain the advantageous financing.”
The Freddie Mac report, in acknowledging this situation, concluded that prices are not adversely impacted by higher mortgage rates. They explained:
“While there is a drop in the demand for homes, there is an associated drop in the supply of homes from the link between the selling and buying decisions. As both supply and demand move together in this way they have offsetting effects on price—lower demand decreases price and lower supply increases price.
They went on to reveal that the Freddie Mac National House Price Index is…
“…unresponsive to movements in interest rates. In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”
The following graph, based on data from the report, reveals what happened to home prices the last six times mortgage rates rose by at least 1%.
Whether you are a move-up buyer or first-time buyer, waiting to purchase your next home based on the belief that prices will fall because of rising mortgage rates makes no sense.