Mortgage interest rates have been steadily rising and are poised to climb even higher this year. When they do, the cost of buying a home will rise as well. This could make today’s buyer’s market challenging for some prospective purchasers—particularly first-time buyers who might have to settle for smaller abodes, fixer-uppers and homes farther out where real estate is less expensive. Here, Realtor.com explains why you should have a sense of urgency if you’re thinking about purchasing a home.
Mortgage rates differ from federal short-term interest rates
Mortgage and interest rates are related, but during the past two decades, they’ve differed by as much as 5 percent and have been as close as 0.5 percent. That’s because mortgage rates are more closely tied to the 10-year U.S. Treasury bond market. Mortgage rates tend to follow bonds, because both may be considered safer places than the stock market to park one’s money. But mortgage rates usually are the inverse of bond markets. The greater the demand for bonds—which tends to happen during economic, political or market distress—the lower the mortgage rates may be. Steady economic growth, along with relatively low inflation and interest rates, has helped push bond rates down for years. However, a widening U.S. deficit and higher inflation could see them increase. Normally, that would help keep mortgage rates low. But other factors such as changes to tax codes, the overall state of the economy and the rise in short-term Federal interest rates can also affect mortgage rates. It’s important to note that mortgage rates still are low and it’s also unlikely they will reach the double digits.
First-time home buyers have the most to fear from rising mortgage rates
About 44 percent of prospective home buyers say they will have to settle for a less-expensive home—smaller or maybe farther away from their jobs—as a result of the rate increases, according to a recent Realtor.com survey. However, first-time buyers and those on the tightest budgets likely will be affected the most. Even a 1 percentage point rise in rates would mean that 5 percent of all buyers no longer would be able to qualify for a $300,000 mortgage, according to a 2016 John Burns study. And despite the increases, the housing shortage and soaring prices likely will only get worse due to a large backlog of buyers. Many people held off from purchasing during the recession because they were worried about their job stability or couldn’t afford to buy. Now, with a stronger economy, they’re entering the market in droves. Many older millennials are beginning to have families or expand their families and simply need the extra space. For these same reasons, along with rising mortgage rates, many homeowners are choosing to stay put and to make improvements or renovations to their existing houses instead. This means there are even fewer entry-level properties on the market for first-time buyers.
Buying a home? Consider locking down your rate
Home buyers worried about rising rates may want to consider locking in their rate with their mortgage provider. This means that the rate is guaranteed once an offer is submitted through the closing. This usually is good only through a previously specified amount of time, and there can’t be any changes to the application. However, the downside is that not all rate locks are free. Ones for less than 60 days often are free but can cost several hundred dollars. And if there are any unforeseen delays in the closing, and the rate needs to be extended, it can cost buyers much more. (The exact figure depends on the individual mortgage lender and the size of the loan.) Another downside: If rates do fall, buyers won’t be eligible for them. But rate locks do protect buyers from higher-than-expected monthly mortgage payments if those rates increase.