Mortgage rates hit 7%: What homebuyers should consider before putting their plans on hold
If you have been thinking about buying a home, you may have noticed an uncomfortable number making headlines lately: 7%.
Mortgage rates have climbed sharply in September, with some daily market measures moving above 7%. Freddie Mac’s weekly Primary Mortgage Market Survey reported an average 30-year fixed mortgage rate of 6.76% as of September 10, up from 6.71% the previous week and 6.35% a year earlier. Other daily rate trackers have since reported rates above 7%. (Source: Freddie Mac)
For prospective New England buyers, that can be discouraging. A higher interest rate means a higher monthly principal and interest payment, and it can affect how much home you can comfortably afford.
But before you decide to put your home search on hold, it is worth taking a closer look at what is driving mortgage rates and what options may be available to help make today’s market more manageable.
Why are mortgage rates rising?
It is easy to assume mortgage rates simply follow the Federal Reserve. They do not.
The federal funds rate influences the broader economy, but mortgage rates are also heavily influenced by the bond market, particularly the 10-year Treasury yield. In recent weeks, Treasury yields have climbed toward 5%, putting additional upward pressure on mortgage rates.
Inflation concerns, higher oil prices, economic uncertainty and other factors can all influence investor expectations and the bond market. That means mortgage rates can move even when the Federal Reserve has not yet made a change to its benchmark rate.
For New England homebuyers, this is an important distinction. Waiting for the Fed to change rates does not guarantee that mortgage rates will immediately move in the direction you want.
You can follow the Federal Reserve’s monetary policy decisions and economic data directly through FederalReserve.gov.
What does a 7% mortgage rate mean for your payment?
A higher rate can make a noticeable difference in your monthly payment.
For example, Freddie Mac’s mortgage rate data illustrates how payments change as rates increase. On a $300,000 mortgage, principal and interest would be approximately $1,896 per month at 6.5% compared with about $1,996 at 7%. These figures do not include property taxes, homeowners insurance, mortgage insurance or other costs. (Source: Freddie Mac)
That difference may not sound enormous on paper, but over the life of a mortgage, interest rates can have a significant effect on the total cost of borrowing.
This is why it is important to look beyond the headline rate and consider the entire mortgage payment and loan structure.
Does a 7% rate mean you should wait to buy?
Not necessarily.
There is no way to know exactly where mortgage rates will be six months or a year from now. Rates could move higher, lower or remain around current levels depending on inflation, economic conditions and financial markets.
Instead of trying to perfectly time mortgage rates, consider whether the home you want is affordable for you today.
That means looking at your income, debts, down payment, monthly payment, property taxes, insurance and other expenses. It also means understanding what loan programs and mortgage strategies may be available.
If the numbers work comfortably within your budget, a higher rate does not automatically mean you need to abandon your homebuying plans. Some buyers find it helpful to speak directly to a qualified loan officer to understand the numbers of their unique situation.
A 2-1 buydown could lower your initial payments
One option worth discussing with your mortgage professional is a 2-1 buydown.
A 2-1 Buydown program provides lower payments during the first two years of the mortgage. The payment is based on a rate 2 percentage points below the note rate during the first year and 1 percentage point below the note rate during the second year. Beginning in the third year, the payment returns to the note rate.
For example, if the note rate were 7%, the payment would initially be calculated using a 5% rate in year one and a 6% rate in year two before moving to the 7% note rate.
The important part is planning for the future payment. A 2-1 buydown does not permanently reduce the interest rate on the mortgage, and borrowers still need to qualify for the loan at the note rate.
Depending on the transaction, the buydown may be funded by the buyer, seller, builder or another party. In some situations, negotiating seller or builder concessions may make this strategy particularly useful.
An ARM may be another option for certain buyers
Another strategy some buyers are considering in today’s higher-rate environment is an adjustable-rate mortgage, or ARM.
An ARM typically starts with a fixed interest rate for a specified period before the rate can adjust according to the terms of the loan. Because the initial rate may be lower than a comparable fixed-rate mortgage, an ARM can potentially provide a lower starting payment.
An ARM is not the right fit for everyone, though. Before choosing one, make sure you understand when the rate can change, how frequently it can adjust and how high the payment could become.
It is helpful to understand the differences between fixed-rate mortgages and ARMs, including how ARM payments can change over time. It is helpful to speak with a knowledgeable loan officer who can look at your specific situation.
Don’t forget about down payment assistance
Interest rates are not the only challenge facing today’s buyers. Coming up with enough cash for a down payment and closing costs can also be difficult, particularly when home prices remain elevated.
Mortgage Equity Partners offers several down payment assistance options, including its MEP Advantage DPA Program and Chenoa Fund programs. Depending on eligibility, these programs can help qualified buyers with some of the money needed for a down payment and closing costs.
MEP Advantage DPA, for example, offers options designed to help eligible buyers cover the 3.5% FHA down payment requirement. The program currently lists a minimum FICO score of 600 and does not require the buyer to be a first-time homebuyer, although homebuyer education is required for at least one occupying buyer. Program availability and eligibility requirements can vary, so buyers should speak with an MEP loan officer for current details.
While down payment assistance does not directly lower your mortgage interest rate, reducing the amount of cash you need to bring to closing can leave more money available for reserves, moving expenses and other costs of becoming a homeowner.
Knowing all your options matters more when rates are high
When mortgage rates are elevated, it becomes even more important to compare your options. A difference in rate, points, lender fees or loan structure can affect both your monthly payment and the overall cost of the mortgage.
You should also look beyond the advertised interest rate. Ask about the APR, closing costs, points, mortgage insurance and any other fees that could affect the actual cost of the loan.
Speaking with a qualified loan officer is a great way to learn about the different options that can be available to your situation.
What if mortgage rates fall later?
This is another question many buyers have right now.
If rates eventually decline, refinancing could potentially allow a homeowner to replace an existing mortgage with a new loan at a lower rate. However, refinancing is never guaranteed to make financial sense, and there are typically closing costs and other considerations involved.
The better approach is to make sure the mortgage you take out today is affordable based on today’s numbers rather than buying a home based solely on the hope that you will be able to refinance later.
If rates do improve in the future, you can then evaluate whether refinancing makes sense for your individual situation.
The bottom line for homebuyers
A 7% mortgage rate is certainly different from the historically low rates many buyers became accustomed to several years ago. But it does not mean there are no opportunities in today’s housing market.
The key is to look at the complete mortgage strategy, not just the headline rate.
A 2-1 buydown could help reduce payments during the first two years. An ARM may offer a lower initial rate for buyers who understand and are comfortable with the future adjustment risk. Down payment assistance could reduce the amount of cash needed upfront. And shopping multiple loan offers can help you compare the costs and terms available to you.
Most importantly, don’t make your decision based on one interest-rate number in the news. Talk with a loan officer about your specific financial situation and explore the programs that may be available to you.
Mortgage Equity Partners can help homebuyers evaluate their mortgage options and find a loan strategy that fits their budget, goals and plans for homeownership. Reach out to a local New England loan officer to learn more about programs you qualify for or start the pre-approval process today.
