Rising mortgage rates leave homebuyers at a loss for what to do next. Even the smallest of increases can cost thousands of dollars throughout the lifetime of a loan.
Rising Mortgage Rates
The Federal Reserve is continuously increasing its key interest rate. The key interest rate is often an indicator of the direction in which mortgage rates will move. The next increase in the key interest rate could have a lasting impact.
Dependent on the duration of a mortgage, even the smallest of increases can add a substantial amount to your overall total. The steady increase in interest rates puts pressure on homebuyers to purchase homes as soon as possible. The longer they wait the more likely the interest rate will increase and further cost the borrower.
These conditions make buyers more cautious when it comes to purchasing a home. Meaning they are less willing to buy, limiting the sellers’ ability to raise their prices. Currently, mortgage rates are at 4.65% for 30-year, fixed-rate loans. Should the rate increase by a single percentage point, over thirty years it can cost the average buyer up to $50,000. To scale this means that an increase of 0.05% can cost a buyer $2,500.
The current market prediction is that mortgage rates may peak at 6% in the coming years. Which could be a very expensive 1.35%. Costing buyers not only money but opportunities, as they may end up settling on less than desirable conditions. If their ideal home is out of their budget, then the average buyer will have to downsize. Often enough buyers will simply have to increase their range or live in an area near the one they originally intended.
The 5% Peak
Should mortgage rates pass 5% it would be the first time they have done so since 2011. These developments have lowered the number of mortgages being taken out. To offset this, lenders are attempting to use special offers to attract customers. Some are going as far as lowering their prices. Banks and credit unions are likely to offer lower prices in a bid to draw back in potential borrowers lost due to the current status of the market.
What Is A Rate Lock?
To prevent losing out due to the increasing rates it is almost essential to get a rate lock. Guaranteeing a specific rate upon completion of an offer. This way should rate increase the borrower is unaffected. This can be a double-edged sword in situations where the rate falls yet has already been agreed upon by borrower and lender. However, in most cases the rate will increase, it just is not for certain.
Some borrowers are looking to adjustable-rate mortgages as a solution. However, adjustable-rate mortgages worry most borrowers as they were a major factor in the housing crash. An adjustable-rate mortgage is a loan in which the initial interest rate is low and at set intervals, are increased. The issue is should things not go to plan it is highly likely that a borrower will be unable to afford their increased rate.
Lower initial rates are making lower mortgage payments possible. The issue arises when the rates are being adjusted, borrowers should not hope for the best when agreeing to an ARM. The worst-case scenario should always be assumed. If the market is not as forgiving as anticipated or refinancing is not possible then a borrower can find themselves in trouble. Interest rates may slip at some points but they are always moments away from climbing higher than before.
People are quick to point to new regulations which have made borrowing safer for consumers. However, should these standards not be upheld the mortgage market will find itself at risk again. The interest rate cap seems to be substantial when it comes to protecting consumers from loans snowballing. Though with success comes relaxed oversight, which is how the housing crash came about in the first place.