Mortgage rates have climbed to their highest level since 2008, pinching home buyers’ purchase power. The 30-year fixed-rate mortgage averaged 5.78% this week, far above its 2.93% average just one year ago. The Federal Reserve’s decision Wednesday to raise its key benchmark rate by the highest amount in 28 years sent shock waves through financial markets, including adding further pressure on mortgage rates.
“These rising mortgage rates hurt affordability and decrease the purchasing power of many buyers,” Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®. “In addition to increasing the amount buyers will pay to borrow for their mortgage, higher interest rates lower their purchasing power since a larger portion of their monthly payment will be put toward interest.”
This means more buyers must readjust their home-shopping budgets, as the impact of higher rates translates to a 25% drop in house hunters’ purchasing power since the beginning of the year. For example, a typical buyer could afford a $360,000 home with a $1,400 monthly mortgage payment at the beginning of the year. Now, with near-6% mortgage rates, a $1,400 monthly payment translates to a $270,000 home.
Where Do Rates Go From Here?
This week’s 5.78% average for the 30-year fixed-rate mortgage is up from 5.23% last week. Every bit of that bump is being felt by home buyers, economists say. For example, a $300,000 loan with a rate of 5.23% would cost a borrower about $1,653 per month (excluding taxes and insurance). That same loan at this week’s 5.78% average would cost $1,756—an extra $1,236 a year.
The latest increase in mortgage rates has largely been attributed to the Fed’s hike of 75 basis points to its key benchmark rate. “It’s possible that this large increase could be somewhat of an over-correction on the part of lenders, and, as a result, it may fall somewhat over the coming weeks as lenders better adjust to the current high-inflation environment. “Mortgage rates have already risen considerably higher and faster than what most predicted they would at the start of the year (and by a great margin than the Fed Funds Rate itself)—and, as evidenced by today’s latest figures, lenders have shown a willingness to continue to raise rates, even as homebuyer demand falls.”
Mortgage applications for home purchases—viewed as a gauge of future homebuying activity—are down 16% year over year, according to the Mortgage Bankers Association.
Hikes Across the Board
Freddie Mac reports the following national averages for mortgage rates for the week ending June 16:
- 30-year fixed-rate mortgages: averaged 5.78%, with an average 0.9 point, rising from last week’s 5.23% average. A year ago, 30-year rates averaged 2.93%.
- 15-year fixed-rate mortgages: averaged 4.81%, with an average 0.9 point, increasing from last week’s 4.38% average. A year ago, 15-year rates averaged 2.24%.
- 5-year hybrid adjustable-rate mortgages: averaged 4.33%, with an average 0.3 point, rising from last week’s 4.12% average. A. year ago, 5-year ARMs averaged 2.52%.
As you can see from the data above, there is a way for homebuyers to reduce the impact of higher mortgage interest rates and that is an Adjustable Rate Mortgage, or ARM.
ARMs offer a fixed rate for a set period – typically 5, 7 or 10 years – after which the interest rate resets to current market rates. A 5/1 ARM, for example, has a fixed rate for 5 years and then resets every year after that, while a 5/6 ARM is fixed for 5 years and then resets every 6 months. Loans reset based on a reference index like the Secured Overnight Financing Rate (SOFR) or the rate on short-term US Treasuries. There are also caps on how much a rate on an ARM can go up or down during each reset period and over the life of the loan.
While many home buyers are looking at ARMs as the best bridge until rates come back down and they’re able to refinance into a more competitive fixed rate, many simply don’t plan on living in the home for more than 5-10 years thus locking in the associated lower rates for the term of their intended ownership.
If you, or someone you know is considering Buying or Selling a Home in Columbus, or any of our other Central Ohio communities please give us a call and we’d be happy to assist!
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