Making Sense of Today's Interest Rates

Mortgage interest rates have risen sharply in the past year, having bumped around the 3% -4% range for the last decade. After getting so accustomed to that range of rates, many borrowers are struggling with today’s level in the 6% span. However, historically speaking, today’s home loan rates are actually below average. What does that mean for the current market and how can you make the best of these higher-but-still low rates?

Buyer Expectations

While mortgage interest rates stayed low during the pandemic, home prices skyrocketed. Thanks to low rates, buyers were often able to stretch a little and keep up with the growing prices, but once mortgage rates began to jump as well, the new higher monthly payments were frequently out of reach for buyers. For example, a home purchase for $350,000 at 4% would yield a monthly principal and interest payment of about $1,670. But the same amount at 6.25% would bump the payment up to $2,155, an almost $500 a month increase.

A recent survey by John Burns Research and Consulting found that buyers have been so conditioned to lower rates that 71% say they will not accept a 30-year fixed rate mortgage rate over 5.5%. At the time of the survey the average rate was 6.4%.

Buyers also believed that a “historically normal mortgage rate” was under 5.5%. However, the data from Freddie Mac going back to 1971 shows that the true average is 7.75%. 

Another survey from U.S. News and World Report found that 66% of those planning to buy a home this year said they are waiting to buy until rates fall. That may put a damper on the housing market, as mortgage interest rates have averaged over 6% for over seven months now. And the Federal Reserve is not done fighting inflation, which means there is the possibility of more rate hikes this year.

Homebuilders seem to have clued in to the 5.5% tipping point for buyers. Many are subsidizing borrower rates to that level or lower to clinch their sales. 

“Our consulting team has witnessed this across the country, noting that home builders who choose to subsidize buyers’ mortgage rates, bringing the overall rate down below 5.5%, have been achieving the most success. Many of the largest builders in the country have been buying mortgage rates down below 5.0%,” said CEO John Burns and Maegan Sherlock, a senior research analyst, in the report.

Sellers Expectations

If buyers are not interested in home purchases until rates fall below 5.5%, home sellers are even less interested in selling while rates are at their current levels. The majority of current homeowners have mortgage loans with rates well below today’s rates. It is very difficult for sellers to stomach giving up their nice low rates and manageable payments in exchange for rates that might be double what they are used to. This is contributing to less inventory on the market, which in turn pushes prices higher and makes it harder for buyers to afford the available stock.

How to Make the Most of Today’s Rate Climate

If you are a potential homebuyer, it’s important to reset your expectations that interest rates may not go down much in the foreseeable future. There are a few things you could do to lower your interest rate in today’s economic climate. If you are able to significantly increase your down payment, your risk as a borrower goes down and your lender can knock off a little from your rate. To guarantee a lower rate, you can pay discount points to your lender. A point is equal to 1% of the loan amount and each point paid can lower the offered rate by roughly 0.25%. While this feels like a lot of money upfront, it will save you lots of interest over time and bring your monthly payment down to a more manageable level.

Also, it's important to realize that rates will come down again in the future and that when they do it might make sense to refinance your home to a lower interest rate. If you have any specific questions on this topic or any other mortgage related questions - we'd love to discuss those with you by phone. Give us a call today!