For the first time in over a decade, rates for the average 30-year fixed mortgage have jumped above the 6 percent threshold. According to NextAdvisor, aside from a short eight-week period of time in 2018, they have not been this high since 2011. For those following along, this has been one of the biggest and fastest rate increases in history. Sure, there have been bigger moves in mortgage rates in the past, but it took much longer to actually get there. And while a rate of 5.75 percent is relatively low from a historical perspective, it has those looking to buy or sell a home scrambling for answers.
Top of mind for many is why we are seeing the sudden increase in mortgage rates and whether they are going to continue to rise.
Rising inflation is one of the reasons for the rapid rise. CNBC recently shared the consumer price index (CPI) – a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services – rose to 8.5 percent, its highest level since 1981. It is a fancy way of saying that the amount you pay for everything from gas to food has gone up and is costing you more each month, leaving less in your pocket.
When inflation is too high, the Federal Reserve reacts by applying a more aggressive monetary policy, which invariably leads to higher mortgage rates. CNBC reported in May, the Fed raised its rate by 50 basis points or .6 percent, the largest single increase in more than two decades. And experts predict that as the pressure to contain inflation continues to grow, the Fed could raise its fed funds rate at least eight to 10 times throughout the year. When the Federal Reserve makes it more expensive for banks to borrow by targeting a higher federal funds rate, the banks, in turn, pass on the increased costs to their customers. This usually means interest rates on consumer borrowing, including mortgages, tend to increase.
The next logical question is what all of this means for homebuyers and home sellers.
- Inflation and rising mortgage rates are making it harder to afford a home, plain and simple. With higher costs for everything from gas to groceries, it can be more challenging to save for a down payment. Not to mention, increased rates add hundreds of dollars to monthly mortgage payments. This equals thousands of additional dollars paid out over the life of the loan. When you consider that, according to My Mortgage Insider, for every 1 percent of the interest rate increase on a buyer’s loan, it reduces purchasing power by about 12 percent, it is easy to see why homebuyers and home sellers alike are concerned.
- The higher rates will undoubtedly put a new crimp on housing affordability, but it may not be all doom and gloom. That is because the abrupt increase in rates is hitting amid an extremely competitive market with very low inventory and record-high home prices. The increased rates could help lower demand just enough to make this extremely abnormal housing market look a bit saner. And while these higher rates combined with already high home prices mean that some buyers will be priced out of certain markets, most will benefit from the slight dip in competition and less frantic pace we have been dealing with.
While the cost to buy a home is most certainly higher than it has been, it is important to note that from a historical perspective, mortgage rates are still relatively low, and if you are in the market for a new home and have your finances in order, there is no reason you should wait. That being said, with the speed at which mortgage rates are changing, it is important to do your homework. There can be a wide variation in mortgage rates, sometimes as much as a full percentage point, between different lenders. So while you might be tempted to try and time the market better if you are ready to buy, do not let the higher home prices and interest rates get you down; just be sure to shop around! Contact a loan officer at Sanctuary Home Mortgage for more information.
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