What Higher Mortgage Rates Mean for You

Why Are Mortgage Rates Rising?

Mortgage rates hit historic lows over the last few years thanks largely to the economic impact of the COVID-19 pandemic. The Federal Reserve slashed interest rates to stimulate economic growth. This led to a surge in demand for traditional 30-year fixed-rate mortgage loans. Millions of people also uprooted their lives when the country went into lockdown, with many people buying homes in more rural and suburban areas.

The U.S. is also experiencing a shortage of affordable housing, especially starter homes that help people build wealth. This lack of supply in real estate is increasing demand for homes and has sent prices soaring. The market is extremely competitive with potential buyers outbidding each other.

The economy has been recovering since the start of the pandemic, with consumers buying more, traveling and trying to return to pre-pandemic norms. The economic stimulus that was distributed also encouraged consumers to spend more and allowed some businesses to continue to grow. This increase in spending and economic activity contributes to inflation and rising prices across goods and services. 

In response, the Federal Reserve is raising interest rates to slow down the effects of inflation. Interest rates have risen sharply from their historic lows, with more interest rate hikes expected throughout the rest of the year.

While mortgage rates are not set by the Federal Reserve, they are influenced by the federal funds rate and generally move in the same direction. So, if the Federal Reserve increases short-term interest rates, it is likely mortgage lenders will also adjust rates on longer-term loans like mortgages.

How Higher Mortgage Rates Affect Homeowners

Experts say rising mortgage rates can be a double-edged sword. Homeowners with adjustable-rate mortgages may see larger monthly mortgage payments as interest rates continue to rise. 

New homeowners and those looking for a home loan will also have higher interest rates, which will affect their monthly payments and how much they pay over the life of the loan.

Take the following example:

Home price: $450,000

Down payment: $15,750 (3.5%)

30-year mortgage

Mortgage rate: 5%

Monthly payment (principal and interest): $2,331

Interest paid over 30 years: $404,964

Mortgage rate: 6%

Monthly payment (principal and interest): $2,603

Interest paid over 30 years: $503,028

To offset the increased cost, some home buyers may look for cheaper homes or increase the size of their down payment, so they have a smaller loan amount.  

In contrast, rising mortgage rates may help prospective home buyers by cooling off an overheated housing market. It will reduce demand for mortgage loans and houses in general. Buyers will face less competition when shopping for a home. 

This might also give home builders a chance to build more homes and have supply catch up with demand, potentially giving more people the opportunity to find affordable homes.

Current homeowners looking to sell may not be able to get as much for their homes as they would if they had sold before interest rates started to rise. Property values won’t grow as quickly as they did in years past. 

Home values may even fall in some areas if supply increases in areas that were temporarily inflated due to increased demand. However, it will likely take a while for housing supply to catch up with demand, so we may not see the effects of this on home prices in the short term.

The Federal Reserve aims for what’s known as a “soft landing” when it comes to raising interest rates. This means they are trying to balance raising interest rates to curb inflation, while also trying to not impact economic growth. Raising interest rates too fast could lead to a recession or an economic downturn.

Sudden rate hikes could take many homeowners by surprise, especially when inflation is already raising the prices of everyday goods and is higher than it’s been in 40 years. Some people may have trouble making ends meet if rates continue to climb because rising rates affect other variable loans like credit cards, student loans and personal loans. 

If you’re worried about the impact of inflation and rising interest rates on your budget, remember to do the following:

• Try to improve your credit score to get the best interest rates on mortgages and consumer loans. 
• Try out different budgeting methods to help you find areas in which you can reduce spending.
• Work with a local mortgage lender to help you find options that work best for you. Credit Unions may have lower rates and fees to help reduce your home-buying costs.

Rates will likely continue to rise as the year goes on. Contact the mortgage loan officers at Ent to learn more about mortgage options and how to lock in the best mortgage rates.