Mortgage Rates Rising: What Home Owners Need To Know
In a sh0cking turn of events, aspiring homeowners are facing a daunting challenge as mortgage rates soar to record-breaking heights. The average mortgage rate has skyrocketed to an astonishing 7.09 percent, a level unseen in the past two decades, leaving all but the wealthiest buyers in a state of financial distress.
This surge in rates has more than doubled since just a few years ago, making the dream of owning a home increasingly unattainable for average Americans.
So, why exactly are mortgage rates reaching such dizzying heights?
Blame it on the Federal Reserve’s vigorous campaign to rein in inflation. The central bank has hiked up the federal funds rate, the interest rate at which banks lend money to each other, in a bid to discourage borrowing and curb excessive spending. The idea is that higher borrowing costs would lead to reduced consumer spending, which should gradually bring down prices. And to some extent, it has worked, with July’s inflation rate standing at a relatively low 3.2 percent compared to last year’s peak of 9.1 percent.
However, the unintended consequence of this fight against inflation is the adverse impact on home-buyers. Mortgage rates tend to move in sync with the federal funds rate, although lenders’ risk management efforts and expectations of future inflation also play a role. As a result, individuals seeking to purchase a home with the help of a mortgage are feeling the pinch.
These loans, which often span a generation with terms ranging from 10 to 30 years, become significantly costlier when interest rates surge. Even a seemingly minor difference in rates can translate into a substantial increase in monthly payments.
To put it into perspective, let’s consider a scenario where a US$250,000 home is being purchased with a 20 percent down payment. Holding all other factors constant, the disparity between a 3 percent interest rate and a 7 percent rate amounts to over $500 in additional monthly payments, according to a Washington Post mortgage calculator. The financial burden on homebuyers is undeniable.
While some may reminisce about the early 1990s when mortgage rates hovered around 7 percent, the current situation is quite different. Housing prices have skyrocketed over the years, far outpacing the growth of most people’s incomes.
Joe Gyourko, a housing market expert at the University of Pennsylvania’s Wharton School of Business, reflects on the past and highlights the stark reality facing today’s buyers. He notes that back then, prices were lower relative to income, especially in coastal markets. In fact, mortgage rates were even worse in the past, reaching over 18 percent during the inflation-ridden 1970s and early ’80s before finally declining.
The burning question on everyone’s minds is: How long will these high rates persist? According to Jessica Lautz, deputy chief economist at the National Association of Realtors, predicting the future path of mortgage rates is akin to winning the lottery.
The trajectory will largely depend on inflation levels and the Federal Reserve’s response to them. While inflation has cooled down considerably, it has yet to reach the Fed’s target of 2 percent. Fed Chairman Jerome H. Powell has made it clear that there is still more work to be done to fully eradicate inflation, even after the recent 0.25 percent rate hike. The exact timing of future rate increases and how long they will remain at the current level remains uncertain.
Amid this tumultuous housing market, some real estate professionals are suggesting a strategy labeled “marry the house, date the rate.” This approach entails purchasing a home at a less favorable rate with the hope of refinancing at a later date to take advantage of rising home prices and secure the best available mortgage deal. However, experts warn that no one can accurately predict when rates will fall. Buyers could find themselves stuck with an unfavourable mortgage for years, cautioning against solely relying on this strategy.
So, how can potential home-buyers mitigate the impact of soaring rates? While buyers will ultimately be limited by what lenders are willing to offer, there are a few strategies that can help. One crucial tactic is to meticulously monitor and improve your credit score over time. Credit reporting agencies consider factors such as debt levels, missed or late payments, and credit history length when calculating credit scores.
Additionally, paying off existing debts before applying for a mortgage can prove beneficial. Mortgage brokers closely scrutinize the debt-to-income ratio of loan applicants and tend to view heavily indebted households as riskier, leading to higher interest rates. By taking these steps, buyers can present themselves as more favourable borrowers and potentially secure a better mortgage deal.
In conclusion, the struggle to buy a home has reached new heights as mortgage rates hit a 21-year record. The Federal Reserve’s efforts to combat inflation have inadvertently placed a heavy burden on homebuyers, making home-ownership increasingly out of reach for many.
