Should I Still Buy Now If Mortgage Rates Have Risen?
The Federal Reserve has been busy laying the groundwork for interest rate hikes that will occur for the first time in three years, with the first expected to hit in March. So, what does this mean for prospective buyers and homeowners? Today, we’ll take a closer look at interest rates and discuss if you should buy now since mortgage rates have risen.
What Effect Does The Federal Reserve Have On Mortgages?
The Federal Reserve is America’s central banking system that executes the country’s national monetary policy through bank regulations and supervision. The Fed serves three primary functions – moderate long-term interest rates, maximize employment, and stabilize prices.
If you understand how the Federal Reserve works, then you know that it doesn’t set mortgage rates, but it creates policies that indirectly affect them. Or in other words, The Fed sets the general tone for the direction in which mortgage interest rates will move.
Historically, as the Federal Reserve raises the rate for federal funds, banks will pass these higher costs onto their customers. When this happens, you’ll also notice that interest rates for consumer borrowing will go up, and when short-term rates go up, long-term rates soon follow.
Why Are Interest Rates Rising Now?
Rates are being driven higher by a combination of the Federal Reserve’s tightening monetary policies and inflation, which soared to 7% at the beginning of January. The bad news is that the rates are expected to rise several times throughout 2022. As of now, officials from the Federal Reserve have signaled that they expect four rate rises during the year, with the increases occurring in March, June, August, and September.
Just one year ago, mortgage rates dipped to the lowest in history, with the National Association of REALTORS reporting that a 30-year fixed mortgage rate was just 2.65% during the first week of 2021. Furthermore, the Association explained that though Omicron and Delta strains were going strong, the jobs market added over 6 million new jobs, the housing market is still performing well, and the economy is growing. Subsequently, rates for 30-year fixed mortgages jumped up to 3.2%, which is almost 60 basis points more than one year ago.
Most experts agree that rates will more than likely reach near 4% by the end of 2022. However, it’s essential to keep in mind that rates have hovered around 9% in years past, so 4% is still historically low and an excellent rate at which to purchase a home.
What Does All Of This Mean For The Housing Market?
All of this brings us to the question most of you are probably thinking: Do higher rates mean that home prices will go down? And, should I buy now since mortgage rates have risen?
Before you start thinking that higher interest rates will price you out of the housing market, it’s vital that we put this into perspective. The truth is that small mortgage rate increases that occur over time will have very little effect on most home buyers’ purchasing power.
For instance, someone with a 30-year fixed mortgage at $200,000 would only pay an extra $25 per month on a .25% interest rate increase. And of course, this also depends on the borrower’s financial profile.
While this is a highly simplified breakdown, most homebuyers could benefit from meeting with a lender to discuss the factors that play into individual interest rates. What this means is that while overall rates can depend on the economy, the Fed, and inflation, your personal rate is affected by factors such as debt-to-income ratio, credit score, the type of property and how you’ll use it, etc. Hence, it’s not just important to watch where rates are moving; it’s also whether a purchase or refinance is the right move financially for an individual situation.
The Bottom Line
In the end, since inflation is higher than all other rates, any money you’re holding in savings will eventually lose purchasing power. For this reason, it’s best to look for alternatives that offer reasonable rates, such as bond mutual funds, money market funds, or bond ETFs. Or you can always invest your money in real estate – and most wealth managers would agree that’s always a safe bet! But, regardless of what you do, set aside enough cash to cover your daily expenses and work to protect yourself from market ups and downs.
