Rising Mortgage Rates and Payments Cause Market Misery
Rising Mortgage Rates and Payments Cause Market Misery
Rising Mortgage Rates: A Challenge for Home Ownership
As the Federal Reserve continues to raise the Federal Funds rate in an attempt to combat inflation, consumers are feeling the impact through higher commercial interest rates, particularly in the mortgage market. This trend is making home ownership increasingly challenging for both first-time buyers and current homeowners.
According to a report from Bankrate, the average interest rate for a 30-year fixed mortgage was 7.20% on July 26, with refinancing rates averaging at 7.35%. However, experts predict that mortgage rates will continue to rise. Coupled with high food, energy, and real estate prices, the dream of owning a home can seem elusive for many.
For first-time buyers, the challenges are causing some to back out of the market altogether. Meanwhile, current homeowners are feeling the strain. A recent survey from Redfin revealed that mortgage payments are now the highest they’ve ever been. The typical homeowner now pays $2,563 on mortgage payments, a staggering 29% increase compared to 2022. Understandably, both homebuyers and owners are growing increasingly pessimistic about market conditions.
Mortgage demand has also taken a hit, plummeting to a 28-year low. Mortgage application volume was 44% lower than the previous year. The Fannie Mae Home Purchase Sentiment Index (HPSI) did show a slight increase of 0.4 points last month, reaching 66.0 out of 100, following a slight decrease in May. However, the recovery in demand is expected to be short-lived, as interest rates are projected to keep rising throughout the year.
One might wonder why mortgage rates are on the rise. The Federal Reserve has been raising the federal funds rate in an effort to combat the highest level of inflation seen in nearly forty years. The objective is to curb spending as consumers face higher commercial interest rates, affecting not only mortgages but also credit card annual percentage rates (APRs) and other loans.
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Since March 2022, the central bank has raised interest rates 11 times, from near zero to a target range of 5.25% to 5.50% as of the July meeting. Analysts anticipate at least one more rate hike before the year’s end. The Federal Reserve’s policy statement affirms its strong commitment to return inflation to its 2 percent objective.
Strategies to Secure the Lowest Mortgage Rates
While mortgage rates may be rising, there are steps that homebuyers can take to secure the lowest possible rates. Here are some tips:
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Increase your down payment: Making a larger down payment on a house improves your chances of securing a better rate. To qualify for the lowest rates, you’ll likely need a 20% down payment.
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Raise your credit score: Your credit score plays a significant role in determining your mortgage rate. A higher credit score reduces the risk you pose to lenders, so it’s important to improve your credit score as much as possible before applying for a mortgage. To be eligible for the lowest rates, aim for a FICO score of 760 or higher.
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Consider an adjustable-rate mortgage (ARM): An ARM starts with lower rates than a fixed-rate mortgage. After a certain period, the rates adjust based on market indexes. If you know you’ll be selling your home in the future, an ARM could be a good option to save on interest.
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Shop around: It’s essential to get multiple quotes before applying for a mortgage. Local lenders and credit unions often offer lower mortgage rates. Consider using a mortgage comparison tool to find the best rates for you.
By following these strategies, prospective homeowners can increase their chances of securing lower mortgage rates and make their dream of owning a home more attainable.
Current mortgage and refinance rates as of March 9, 2023, from Bankrate.
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