Most economic experts predicted that mortgage rates would continue their upward trend in 2018, even though the rates have remained at historic lows. Very recently, they made a big jump as bond yields increased. In fact, interest rates reached the highest level since the end of March. It sure looks like another steady rise could be on the horizon.
So, what does this mean for home buyers (and sellers)? Let’s take a look.
Rate Spikes vs. Downward Overall Trend
Any rise in interest rates directly correlates to the cost of buying a home getting more expensive, especially if home prices haven’t come down concurrently. Right now, home values continue to go up and that trend may continue because of the growing housing supply crisis. Right now, we are on the edge of breaking a key threshold for interest rates. We have been on a long-term downward trend that might soon be over, as you’ll see in the chart below. This latest rate spike indicates a step over the proverbial “line in the sand” that could have massive implications.
Take a look at this rate trend chart for the past 30 years:
How the Rate Increase Affects Buyers
At this point, this mortgage rate increase won’t mean too much in terms of how much an average home buyer pays from month to month. It is important to look at the upward trend, though, so we can understand where the market is heading. With the average rate for a 30-year fixed loan now creeping past 4.6 percent, the 5 percent barrier looms ever so closer. I’ve been on the front lines of the mortgage industry daily since 2004, and I personally feel that mortgage rates staying in the 4s is very important this year.
Whether or not you should buy a home now depends on multiple factors, and the rising interest rate is surely one of them. It may affect how much home you can afford and obviously it matters in the timing of which you lock in your rate while getting pre-approved for the mortgage loan.
The Millennial Factor
Millennials represent the largest contingent of current home buyers. The rising mortgage rates are having a major impact on this generation because they tend to have larger student loan debts and less savings to put toward a down payment. If you are in position to buy now, however, it may be time to act before the rates make another big jump.
Potentially making things more difficult on home buyers is the housing supply crisis. It is important to remember that many current homeowners are into their mortgages with low interest rates. Selling their home and then buying another with higher rates isn’t going to make much sense, so they will stay put and that means further shortage of inventory.
Consider All Your Options
Home buyers and those looking to refinance before the rates go up again significantly will want to consider their options right now. One loan option that is coming back into popularity as a result of these challenging market conditions is the adjustable-rate mortgage (ARM). This is a risky option (especially if mortgage rates keep going up), but it may be the best option in many cases. The good news is that today’s ARMs are fully underwritten and the loan standards are much more stringent than the ones that led to the economic collapse in 2008.
At Transparent Mortgage, we are here to help answer all your mortgage questions and guide you in the right direction when buying a home or refinancing your current home loan. We’ll help you explore every option, get you pre-approved and make sure you do what’s best for your financial future in terms of homeownership. Give us a call today at (619) 929-0199.