Spike in Mortgage Rates: What This Means for Prospective Home-Buyers

2021 offered homebuyers relatively lower interest rates on mortgage loans, encouraging them to pick from the limited inventory but that, coupled with the aftershock of the pandemic, set off a housing boom nationwide and a surge in home-price growth. 

The Case-Shiller National Home Price Index documented an 18.8% increase in average prices of homes across all major metropolitan areas in the United States. 

That increase, which occurred over the span of 12 months, was the highest the index has recorded since its inception in 1987.

However, mortgage rates have also soared rather dramatically this year. Just last week, the average 30-year fixed mortgage rate peaked at 4.03%, the first time since July 2019, it exceeded 4%.

What does this mean for homebuyers?

Analysts like Ralph McLaughlin, Kukun’s (a property data and analytics firm) chief economist, are confident that the hike in mortgage rates shouldn’t bother homebuyers who have to worry about steadily increasing home prices. 

For some who have become familiar with rates for mortgage loans  lingering around the 3% market over the past two years, a jump to 4% and above might be staggering but, rates at this level were the norm before the pandemic. 

And analysts believe that these rates, rather than deter homebuyers, might spur them into the buying market. The rationale for this is hinged on the fact that buyers observing the rising interest rates would want to act as fast as they can before the rates soar even higher.

Why is this happening now?

Some experts have begun answering the questions on the minds of many: what triggered the surge? Some point to January 2022’s 7.5% inflation, the country’s highest in 40 years. Others affirm that mortgage rates often follow in the direction of 10-year U.S treasury bonds. 

Despite the optimism about the economy’s health, the high inflation rate is still bothersome. What it spells out for Americans is a higher cost of living. Necessities such as food and electricity would become costlier, in addition to an already expensive housing market. With the possible Covid variants looming on the horizon, inflation, and potential changes to the Federal Reserve policies, the housing market may only become even more volatile in the coming weeks.

What strategy should be adopted now?

Depending on what the lender is providing, the monthly payment of many homebuyers may increase, and their purchasing power may reduce. A refinance might be a smart alternative for homebuyers with rates bordering the 5% mark to reduce the interest rate on their mortgage loans and save some money on their monthly payment. 

According to Black Knight, a mortgage technology and data provider, some 3.8 million people across the country could save an average of $284 each month as high-quality refinance candidates. 

As prices keep climbing, adjustable-rate mortgages, or ARMs, have found an appeal again among homebuyers. ARMs offer subscribers for a certain period a fixed interest rate before transitioning to a varying rate. 

During the housing crisis in 2008, the loans lost their luster when interest rates spiked, and buyers, as a result, could no longer afford higher payments. However, clients may still enjoy mortgage loans at rates that take more extended periods to increase, with caps on maximum rate increases. Some programs offer clients 30-year ARM at a fixed rate of 3% for 10 years. And on a $350,000 home loan, a client may save an equivalent of $875.

Whichever refinancing option a homebuyer chooses, keeping one’s monthly housing costs to 30% of one’s earnings is wise. That 30% should cover the mortgage payment and other property-related expenses.

What About First-Time Buyers?

In 2021, according to the National Association of Realtors (NAR), the down payment for repeat home buyers was typically 17% of the selling price. But for first-time buyers, it was usually bordered at 7%. However, some mortgage providers like SoFi may allow down payments as low as 3% for first-time buyers. 

Regardless, first-time buyers still struggle with investors and cash buyers. According to NAR, the percentage of first-time buyers in the housing market dropped from 33% a year before to 27% in January and experts believe that the spike in the rates for mortgage loans may spur some first-time buyers and people with limited budgets to drop from the competition, reducing the demand for housing only slightly.