Mortgage rates are increasing. They've been gradually rising for the past several years, with no signs of stopping. If you're shopping for a new home or refinancing your present one, you might wonder how this will impact you.
So, you're thinking about buying or selling a home? This blog post tells you everything you need to know about today's mortgage rates and how they could affect your decision.
What are mortgage rates?
A mortgage, also known as a home loan or property finance loan, is a form of financial assistance provided by a bank or other financial institution to assist you in buying a home. The asset underlying the mortgage is the house itself. As a result, if the borrower fails to make monthly payments and defaults on loan, the lender may sell the property and recoup its money.
A mortgage loan usually refers to a debt taken out for a set number of years. The most common amount of years for a loan is 30 years, but 20 years and 15 years are also common. A loan time frame is known as the "term" of the loan, during which you will repay what you borrowed and any interest charged.
Mortgage rates vary daily and are determined by your credit score, down payment, and other factors. The average 30-year fixed mortgage rate is currently 7.04%, which is still far higher than historical averages. Shopping around for the lowest possible interest rates when purchasing a house or refinancing an existing loan is critical.
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How do mortgage rates affect home buyers?
Your mortgage rate impacts more than just your monthly payment. It also determines the total interest you'll pay over the life of your loan.
When mortgage rates are low, it's an excellent time to purchase a house. Home buyers who lock in a low rate can save thousands of dollars over the life of their loan by buying now while rates are still low.
When interest rates are high, it's often wiser to put your money into a certificate of deposit (CD) or other investment rather than purchasing a home. High mortgage rates can make your monthly payment out of reach and add thousands of dollars to the overall price of your loan.
If you're on the fence about whether to buy or wait, paying attention to mortgage rates is a critical part of your decision-making process.
The current state of mortgage rates
Rates on home loans are going up. Rates have been steadily increasing for many years, with no indication of stopping. The current average 30-year fixed-mortgage rate is 7.04 percent, down two basis points from a week ago on Thursday, October 13, 2022. The national 30-year refinance rate was 7.07% over the previous week, up three basis points.
According to Forbes, the average rate on a 15-year, fixed-rate mortgage rose by 0.33 percent to 6.33 percent this week. The same period last week saw the 15-year, fixed-rate mortgage rate at 6.00%. Today's level is greater than the 52-week low of 4.62%.
The current mortgage rate environment isn't just affecting buyers and refinances and the entire housing market. As rates continue to climb, fewer people buy and sell homes. That would lead to even higher prices for those who buy or sell.
Considering entering the housing market, paying attention to mortgage rates is crucial. They can have a significant impact on both your monthly payment and the total cost of your loan. Get pre-approved for a mortgage to know how much home you can afford before you start shopping for homes.
How are mortgage rates determined?
Several factors go into determining mortgage rates. Some of the most critical include:
- The current state of the economy dramatically impacts mortgage rates. For example, when more people are working and making money, there is generally more demand for loans, so rates rise to meet this demand. However, during weak economic times when jobs are scarce, people have less money and often default on their loans at higher rates, so lenders charge lower interest rates to compensate for the additional risk they're taking by lending money.
- The inflation rate: Inflation doesn't just have subtle effects on mortgage rates; it can cause them to skyrocket. This happens in two ways: first, higher inflation leads to higher interest rates on loans, and second, inflated prices weaken the economy as a whole—and a weak economy means high mortgage rates.
- The federal fund rate: The interest rate banks charge each other for overnight loans is called the federal funds rate. Changes in this important money-market benchmark make ripples throughout the economy and eventually raise or lower mortgage rates.
- Fico Scores: Mortgage rates tend to be higher for people with lower credit scores and lower for those with higher credit scores. The reason is simple: Lenders perceive borrowers with higher credit scores as less likely to default on their loans, so they're willing to offer these borrowers lower interest rates. As you can see, mortgage rates are affected by many different
- Debt-to-income ratio: Your debt-to-income ratio is the percentage of your monthly income that goes toward paying debts, including your mortgage, credit cards, car loans, and other expenses. The higher your debt-to-income ratio, the riskier you appear to lenders, and the higher your mortgage rate will be.
The future of mortgage rates
Mortgage rates are expected to drop in 2023, but that doesn't imply prospective home buyers should wait for a better deal. According to Fannie Mae, the rate on a 30-year fixed mortgage is expected to drop to an average of 4.5% in 2023. It's excellent news, given that borrowing costs have increased by more than two percentage points since the start of 2022, largely thanks to the Federal Reserve bank raising rates.
According to a Fannie Mae study, average rates are predicted to drop from the 5.2% recorded in Q2 this year to 4.7% in Q1 2023 and further down to 4.4% by Q4 2023.
As borrowing costs have increased, many consumers have turned to adjustable-rate mortgages (ARMs) instead of fixed-rate mortgages. According to Zillow data, ARMs accounted for more than 12% of mortgage applications in both June and July this year—the largest share since 2007 and doubled from January this year.
The risk involved with these loans is higher than that of fixed-rate mortgages. For five or seven years, consumers usually pay a set rate; however, depending on the state of the market, they may then owe more considerable monthly sums. "If you're a prospective buyer and you don't have a set deadline for a purchase, and you've got some cushion in your budget if mortgage rates don't move as anticipated, you may wait," Mahoney, CEO of millennial-focused financial planning firm.
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Saving enough money to buy a house might seem difficult. However, with a sound savings strategy, anybody can save enough for a down payment on the home of their dreams.