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rising mortgage rates

What Rising Mortgage Rates Mean for Home Buyers

The year 2021 continued with low mortgage rates, record-high home prices, and limited housing inventory. However, most experts expect mortgage rates to climb in 2022, as the US Federal Reserve pivots to counter inflation at a 39 year high. Reportedly, economists predict mortgage rates to range from 3.4% to 4% in 2022. Rising mortgage rates will affect the ability of home buyers to purchase a home. If interest rates continue their upward trend it could cause a housing market crash.

The Fed is also winding down buying mortgage-backed securities (MBS) and US Treasuries, which it purchased during the pandemic to stimulate the economy. According to the meeting minutes of the Federal Reserve’s December 15 Federal Open Market Committee, the committee members expect mortgage-backed securities purchasing to end in March and the Federal Funds rate to increase in June. 

The Fed’s actions are already affecting mortgage rates. According to the loan experts at Bankrate.com, mortgage rates are trending upwards. For example, as of January 28, 2022, the average 30-year fixed-mortgage rate APR is 3.735%, the national 15-year fixed rate APR is 3.087%, and the average rate of a 5/1 ARM is 2.804%. However, in January 2021, the rates were much less at 2.85% for a 30-year mortgage, 2.36% for a 15-year mortgage, and surprisingly 2.79% for a 5/1 ARM.

rising mortgage rates
What Rising Mortgage Rates Mean for Home Buyers

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First Citizens Bank is an over 100-year-old family-controlled bank with a community focus. The bank’s emphasis is its customers and building lasting relationships. First Citizens offers free checking with paperless statements and online savings accounts.

  • No monthly fees
  • No minimum balance
  • Low opening balance
  • Free digital and mobile banking
  •  Access your account digitally, at branches, or at ATMs
  • Link checking and savings accounts for overdraft protection

What Does Rising Mortgage Rates Mean for Homebuyers? 

Higher Monthly Payments

Potential homebuyers would do best to buy earlier in the year than later to take advantage of lower rates. Mortgage rates are expected to continue to rise in 2022 but have been historically low over the past year. For most of 2021, 30-year mortgage rates averaged around 3%.

Mortgage Interest Rates
Source: Freddie Mac

The Mortgage Bankers Association believes that with the expected increases in rates, 30-year mortgages will be closer to 4% by the end of 2022. The resulting higher monthly payment may price some buyers out of the market.

For instance, a buyer of a $400,000 house with a 20% down payment would have a mortgage of $320,00. The monthly payment with a 3% 30-year mortgage would be $1,349. However, with a 4% 30-year mortgage, the monthly payment would be $1,528. The additional monies would be $179 a month or $2,148 a year. 

Some buyers may not be able to afford the higher monthly payments or qualify for, the higher rate mortgage. However, these interest rates are still near historic lows. According to data from the Fed, the 30-year mortgage rate was still over 4% as recently as 2018. Hence, it may make sense to move forward with your purchase if you can afford the higher payments. In addition, for existing homeowners asking when to refinance their mortgage, it may still be a good time.

30-Year Mortgage Rate History
Source: US Federal Reserve

Lower Inventory

According to the Mortgage Bankers Association, an estimated 6 million houses were sold in 2021. Average house prices were up 15.3%, with a median house price of $362,000. Their housing market forecast for 2022 is anticipating a modest drop of 2.5% in house prices. They believe the increase in mortgage interest and high inflation will mildly slow, but not severely cut, the pace of home sales.

The question is can buyers find inventory in today’s high-pressure market. Realtor.com states existing homes have a 1.8-month supply, below the typical 6-month period. Freddie Mac estimates the nation would need 4 million homes to meet current demand. The inventory shortage is a perfect storm between years of the underbuilding of new homes and millennials ready to hit the real estate market as first-time buyers. The result is the lowest inventory in forty years.

The reduced inventory, high pace of sales, and fierce competition for houses may leave buyers unable to find a house. However, homes selling well above listing prices are the norm in many parts of the country. According to Bankrate, in California and Colorado, around 60% of homes are selling above their list price. Houses are selling before they even reach the market. As a result, first-time buyers are finding themselves stuck in the rental market, which in turn is driving up rental prices. Zumper’s Annual Rental Report shows median rental prices went up 11.6% for a one-bedroom apartment and 13.6% for a two-bedroom one in 2021.

The combination of low inventory, rising mortgage rates, and rising prices are reasons potential home buyers may want to buy sooner instead of later. 

Look in Different Regions

Prices vary significantly across the country. Moving to a more affordable area and employing a strategy of geographic arbitrage can help new buyers purchase a house. Some regions may also have greater inventory, with less competition. With the increasing acceptance of remote work, workers are no longer required to go to the office. These workers are not tied to their current area and can settle in other locales based on different lifestyles and quality of life desires. Many who worked in the cities and rented are now buying houses in the suburbs since they no longer commute.

According to the Federal Reserve Bank of St. Louis, in 2021, the least expensive state to purchase a home in was West Virginia, with an average price of $117,765. The highest average price was the District of Columbia, with an average selling price of $691,997. With a 20% deposit in each state and a thirty-year mortgage at 3.730%, The monthly mortgage payment would be $579 in West Virginia and $3079 in the District of Columbia. This difference of $2,500 does not consider real estate taxes, HOA, or homeowners’ insurance.

Plan Ahead

Potential buyers should get pre-qualified before looking at houses to help determine their price range and how it fits their budget. Consumers can’t afford to waste time looking at properties outside of their price range in today’s hot real estate market. An experienced real estate agent and mortgage broker can offer expertise to make the search less painful.

Buyers should bring a larger down payment to make their offer competitive in a tight market and help make their mortgage payment affordable. For example, suppose you save an additional $10,000; then the larger down payment will lower the loan-to-value (LTV) ratio, possibly resulting in a lower mortgage rate. Lenders usually view a lower LTV ratio as less risky since buyers will have more equity in their homes. Monies need to be in an account for at least 60 days to demonstrate the ability to finance the purchase.

Comparing the different mortgage products is essential and will vary according to finances, income, and credit score. Although adjustable-rate mortgages may be appealing, consumers should examine how the interest rate can change after the fixed-period part of the mortgage. Once the term resets, borrowers may have a sticker shock if the low initial interest rate increases. The initial term is set below the market rate on a similar fixed-rate loan. 

Adjustable-rate mortgages may be best for those who cannot qualify for a traditional mortgage and plan to refinance or sell in the fixed-period term. However, the risk of an ARM resetting higher increases in a period of rising mortgage rates. The Chairman of the US Federal Reserve has stated there is “… there’s quite a bit of room to raise interest rates….” This statement suggests mortgage rates will probably trend higher in 2022.


Affiliate

First Citizens Bank is an over 100-year-old family-controlled bank with a community focus. The bank’s emphasis is its customers and building lasting relationships. First Citizens offers free checking with paperless statements and online savings accounts.

  • No monthly fees
  • No minimum balance
  • Low opening balance
  • Free digital and mobile banking
  •  Access your account digitally, at branches, or at ATMs
  • Link checking and savings accounts for overdraft protection

Buyers May Need to Wait

Traditionally the real estate market has more houses listed in the springtime. These already built homes increase inventory and allow first-time buyers into the market. For 2022 new construction is a significant variable. In 2021 labor shortages, high materials prices, and COVID-19 outbreaks caused delays. These same issues are expected in 2022. However, if builders ramp up home starts and completions in 2022, inventories may rise. Higher inventories may stabilize prices in some areas.

Buyers should stay resilient in the competitive housing market. Flexibility and preparation are essential. A buyer’s intended timeline may not work out as planned with so many unpredictable variables, but they can persevere and attain the goal of homeownership with time.

Thanks for reading What Rising Mortgage Rates Mean for Home Buyers!

You can also read How to Save $10,000 in a Year by the same author.

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Christine Seaver is a freelance writer that writes about personal finance, budgeting, and debt. She is a frequent contributor at Dividendpower.org. Christine works as an office manager by day and a cookie baker at night. She lives in Massachusetts with her family.

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