What do Today’s Mortgage Rates Mean for Borrowers?

The global pandemic rocked the real estate industry, with nationwide home prices soaring by some 27% in a single year and mortgage interest rates reaching historic lows. In November of 2020, the average rate for a 30-year fixed-rate mortgage—the most popular type of home loan—sunk to an average of 2.72%. That was nearly a 1% decrease compared to pre-pandemic rates. Many borrowers with excellent credit histories scored an even better deal.

But all good things come to an end, they say. Today, mortgage rates are climbing again. As of mid-May of 2022, that same 30-year fixed-rate mortgage was averaging 5.27%. Home values are still very high, though analysts predict only a modest 5% increase in prices for 2023. Compare that to the bump we saw over the past couple of pandemic years—19% in a single year—and even a 5% increase is quite a relief for homebuyers and much more in keeping with historical levels. 

Based on these figures, many of us would conclude that the best time to buy a home has passed us by. But the predicted 5% return on investment you might see if you bought a home isn’t exactly shabby. Real estate has long been considered one of the safest investments you can make. So don’t dismiss the idea of buying a home if you need one. 

Economic Factors That Affect the Real Estate Market

In short, there are lots of them. And many are interdependent. 

Let’s start with home prices. During the early years of the pandemic, when we were facing a very uncertain economy and critical health risks, many homeowners who might have otherwise chosen to sell their homes, took the conservative route. They stayed put. On the other hand, homebuyers looked around and saw the opportunity to lock in a low mortgage rate and were anxious to purchase. The result was a low supply of homes and high demand for them. Prices rose accordingly. That’s the law of supply and demand, which affects every industry. Today, record inflation rates are causing price increases in every category. Between March 2021 and March 2022, the consumer price index rose by 8.5%. Home sellers are seeing their daily living expenses skyrocket. From home repairs and energy rates to the price of a hamburger, they’re facing a much higher cost of living. They’re looking for top dollar for their homes simply to make paying their bills easier. That’s a tough pill to swallow for home buyers since their expenses are increasing, too. But sadly, that’s just the way it is.

You can blame inflation on a lot of things. The disruption of the supply chain during the early years of the pandemic is one factor in rising prices. Remember when you couldn’t find toilet paper anywhere? You’re probably still noticing missing canned goods on grocery store shelves. Consumers have fewer choices and they’re paying more for them.

Some economists see the rate of inflation as related to the interest rates set by the Federal Reserve. Low rates inspired people to borrow money, and they used it to buy more things. That increased demand while supply was still low and raised prices in the process. To halt today’s rapid rate of inflation, the Fed has raised its rates over the past couple of months. By making borrowing less appealing, the Fed hopes to decrease demand across all markets. Conventional financial wisdom tells us that lower prices will result. Let’s hope so. But the supply chain is still disrupted, and raising interest rates alone may not be enough to stop inflation. 

Now let’s turn to the other factor that influences the cost of homeownership: interest rates. When the Fed increases interest rates, banks have to pay more to borrow. Unfortunately, they pass that cost increase along to homebuyers in the form of higher mortgage interest rates. Banks have to meet corporate earnings requirements—especially those that are publicly traded. Here’s a tip if you’re looking for home financing. Credit unions exist to serve their members and are not beholden to the same corporate demands. So if you’re looking for a mortgage, your local credit union could be a great place to start shopping for one. 

Mortgage interest rates are also related to the federal treasury markets—specifically the ten-year treasury note. Banks traditionally invest in T-notes. T-note yields vary and were atypically low during the early years of the coronavirus crisis. That’s because, during the economic downturn that accompanied the pandemic, investors flocked to the relative safety of government-backed securities. The law of supply and demand prevailed once again, and T-note yields dropped to around 1.3% at the height of COVID. Banks found that they could earn more by issuing mortgages, even at very low rates, than by investing in these securities. Now that T-note yields are rising again—over 3% in recent days—they’re a more attractive investment option. As T-note yields continue to climb, we can expect mortgage interest rates to climb with them.

How to Get the Best Rate on Your Mortgage

So what’s a homebuyer to do? There are several sure-fire ways to secure a lower mortgage rate or lower your total cost of owning your home.

The first is to improve your credit score. If you can raise your credit score by 100 points, you’ll enjoy lower monthly payments and lower your overall cost of homeownership by tens of thousands of dollars over a 30-year mortgage term. The good news is that raising your credit score isn’t as hard as you think. Bringing all of your credit accounts current will help. So will paying more than the minimum payment due on your credit cards. Closing credit accounts you no longer use can also improve your score. The more you pay down your credit cards; the lower your debt-to-income ratio will be. That’s another factor lenders consider when deciding what interest rates to offer you. 

The second way to secure a lower interest rate is to choose a shorter-term mortgage. Many homebuyers choose a 30-year mortgage by default because they come with lower monthly payments. But if you take a longer view, you’ll pay more by taking out a long-term mortgage. Consider that you’ll be paying interest for fewer years when you choose a shorter-term mortgage. Usually, 15-year mortgages come with lower interest rates at the outset. That brings down your total interest payments even further. So if you can comfortably afford to pay a higher monthly payment, choosing a 15-year mortgage may be a smart strategy for you. You’ll build more equity in your home more quickly with a short-term loan. That may turn out to be handy should you need to borrow against your home equity for home renovations, college tuition, or other significant expenses.

The third way to lower the interest rate you pay on your mortgage is to choose the right kind of mortgage lender. We’ve already mentioned that credit unions tend to beat commercial lenders’ rates. So if you’re thinking about taking out a mortgage, go and join one. You can become a credit member quickly and inexpensively by opening a checking or savings account with the firm.

You may also qualify for a low-interest government-backed mortgage. Active service members, veterans, and their spouses are eligible to apply for a VA loan. Because VA loans are guaranteed by the federal government, lending institutions consider them lower risk. So they offer lower interest rates on them versus traditional mortgages. On average, VA loans are the lowest-interest mortgages out there. They come with the added perk of having less stringent credit score requirements. You may even be able to purchase a home with no down payment if you qualify for a VA loan. 

USDA loans come with some of the same advantages that VA loans offer: lower interest rates, more lenient credit requirements, and a no-down-payment option. Originally developed by the government as a way to speed the development of rural areas, the program has expanded to include more than 90% of all zip codes. So if you’re seeking a quiet place outside the city, a USDA loan can save you some money. The only catch with USDA loans is that you must meet a somewhat low-income standard. For households that include between one and four members, the income threshold for USDA loan eligibility is around $90,000. That makes them an excellent choice for middle-income families.

What Does the Future Hold for Homebuyers?

If anyone tells you they have a crystal ball and can predict exactly where the real estate market is headed, walk away. If we’ve learned anything over the past couple of years, it’s that the economy can change in a heartbeat. The only thing that hasn’t changed over the long term is that real estate is historically an excellent investment. So whether you’re hankering for more space or a neighborhood with great schools, or you’ve found a great new job out of state, don’t let higher interest rates or home prices deter you. Since 1965, the median home price in the US has increased from $17,000 to $405,000 in March of 2022. Investing in a home offers less risk than investing in the stock market while offering a moderate rate of return. That’s just one reason why so many Americans dream of owning a home. And by relying on the counsel of a highly-qualified real estate agent and reputable mortgage lender, you can make your dream come true, too. Here in Colorado, Kennar Real Estate has served homebuyers faithfully for two decades, protecting your interests throughout the home purchase process. With an A+ rating from the Better Business Bureau and a large inventory of homes ranging from condominiums to multi-acre woodland hideaways, our agents can guide you toward the purchase of your perfect property at a price you can afford.

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