What Do Higher Mortgage Rates Mean for Home Buyers?

Mortgage rates are a key part of the homebuying process. Take a look at our answers to eight questions about high mortgage rates.

Congratulations! You’re at the point in your life where you’re thinking about buying a new home. This exciting milestone involves so many thrilling changes: a new neighborhood, new spaces to decorate, and most importantly, a place to call your own. Thinking about these changes is wonderful, but before you can make them happen, you have to secure a mortgage.

As you’re applying for a home loan, you’ll need to keep an eye out for a good mortgage rate. Currently, mortgage rates are increasing for the first time in the past couple of years. So what exactly is a mortgage rate, and how does it affect you? Take a look at our answers to these questions about this part of the home buying process.

What Is a Mortgage Rate?

Simply put, a mortgage rate is the interest rate on your house payment. It is set by the lender and can be either fixed or variable. A fixed mortgage rate remains the same for the length of the mortgage. A variable mortgage rate changes according to a benchmark interest rate. 

There are different types of both fixed and variable mortgage rates, and the way that they differ is their term. For example, there are both 15-year fixed-rate mortgages and 30-year fixed-rate mortgages. 

You may also be able to sign up for a 5/1 adjustable-rate mortgage, which means that there is a fixed rate for the first five years, and that rate is lower than the other comparable fixed-rate mortgages. Starting in year six, the adjustable rate is used until the mortgage is paid off.

Similarly, 5/6 hybrid adjustable-rate mortgages are another option. Just like the 5/1 option, this mortgage rate is fixed (lower than comparable rates) for the first five years, but after the first five years are up, the interest rate can change every six months.

How Do You Estimate a Mortgage Rate?

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Let’s face it: budgeting is extremely important. You absolutely shouldn’t sign your name on the dotted line and agree to buy a house if you simply can’t afford the mortgage payments. You have to pay for all of your utilities, as well as homeowner’s insurance, in addition to your mortgage. So, you need to know – ahead of time – how much you should expect to pay for your mortgage each month.

The first step to estimating a mortgage is researching online. Only trust information from reputable sources. You may be able to access your bank’s current mortgage rates directly through their website.

However, your bank may not share its current rates online, or it may be offering rates that are way too high compared to the average. So, you need more than one way to find out how much you could potentially be paying in interest on your mortgage each month. Here’s another option:

What Is Prime Rate and Treasury Bond Yield?

If you are planning on buying a home in the near future, you can estimate mortgage rates by looking at the prime rate. The prime rate is an indicator that shows the lowest average rate banks are offering for credit. Usually, the prime rate is about 3 percent higher than the current federal funds rate.

The prime rate isn’t the only number you can look at to help you estimate your mortgage. It’s also helpful to look at the 10-year Treasury bond yield. This is an indicator that helps show market trends. If the bond yield falls, then it’s likely that mortgage rates will also fall. You may be able to research and find out if the Treasury bond yield is predicted to fall later in the year when you want to buy a house. If that’s the case, you probably want to wait. 

However, not everyone can wait to buy a house. Your lease on your rental home or apartment may be expiring and you have to move out. Or, maybe your family is growing, and you need more space on a specific timeline. 

If you need to move by a set date, you’ll have to bite the bullet and buy no matter what – but at least you’ll have a good idea of what your mortgage rate will be ahead of time, so you can prepare.

Why Are Mortgage Rates Rising? 

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As the economy improves and inflation increases, mortgage rates will also increase. The Federal Reserve announced that it was going to offload mortgage-backed bonds on a timeline that was faster than what was expected. It’s also predicted that economic activity will quickly grow, and growth affects mortgage rates.

These are general trends, but in reality, there’s no doubt about it: it’s going to be more expensive to buy a home very soon. CNN Business reported that Freddie Mac Chief Economist, Sam Khater stated, “Mortgage rates increased during the first week of 2022 to the highest level since May 2020 and are more than half a percent higher than January 2021.”

So, mortgage rates are increasing because of economic growth and inflation, and the new home buyer is going to end up paying the bill.

How Will A High Mortgage Rate Affect Me On a Month-to-Month Basis?

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Even small changes in the mortgage rate can have a significant impact on a buyer’s monthly mortgage payment. For example, in just three weeks the average mortgage rate increased dramatically. That average rate increase equals a $125 monthly mortgage payment increase for home buyers.

That amount, $125 a month, totals out to $1,500 a year, which, if you look at a 30-year fixed home loan, totals $45,000. That’s a significant amount of money, and it’s also why it’s so important to purchase a home when mortgage rates are low.

Can I Do Anything To Change My Mortgage Rate?

It’s helpful to know that after 10 years, many people refinance their mortgage at a new rate. That helps you save on a month-to-month and long-term basis. Before you sign the dotted line on your mortgage agreement, make sure you shop around for the best rates out there.

How Much Does My Credit Score Matter When Mortgage Rates Are High?

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Wondering about whether or not your credit score will affect your mortgage rate? The answer is that it definitely does. You need a good credit score to qualify for the best rates. If average mortgage rates are high and your credit score is low, then that’s a recipe for a high-interest rate, which will hit you deep in the pockets over the lifetime of your loan.

Work on improving your credit score before you apply for a home loan. Settle any debts that you may have if you can. Make all your payments on time and keep your credit utilization low. A high credit score will significantly help you when you’re applying for a home loan!

Do High Mortgage Rates Affect Home Prices?

There’s not a simple answer to the question of how high mortgage rates affect home prices. In general, the answer is that when mortgage rates are high, demand drops (because fewer people can afford to pay a mortgage), and therefore home prices also drop.

This is the general thinking, but it’s not a hard-and-fast rule. Inflation also plays a role in home prices, and the demand in different markets will affect the answer to this question as well.

Generally speaking, when mortgage rates are high, home prices are lower.

Where Are Mortgage Rates the Highest?

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Are you a remote worker who can live just about anywhere? This is the reality for many people who are eager to move to an area where they can get the most bang for their buck. If you’re flexible and you want to live in a state with a low average mortgage rate, you might be surprised at what you’ll find. 

In 2019 LendingTree released a study comparing average mortgage rates in the United States. They found that “California, New Jersey, Washington, and Massachusetts are the states with the lowest average interest rates.” The rates they listed in the study are actually much higher than today’s rates, which decreased because of the global events of 2020.

The study found that average mortgage rates were the highest in New York, Iowa, and Arkansas – so if you’re looking to move to one of those states, do your research first, and be prepared for a possibly high mortgage rate.

We all wish we could have a crystal ball that will tell us exactly when mortgage rates are lowest and when the best real estate deal hits the market. Since we can’t predict the future, the best thing to do instead is to build up your credit score, research the best time to buy, wait until then, and negotiate your rate if possible (yes, you can negotiate a mortgage rate!). Once you’ve signed on the dotted line, you’ll be able to rest easy knowing you did everything you could to get the best deal.

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