Mortgage rates are on the rise. Should you be worried?
Mortgage rates have gone up, up, and up in recent weeks.
Some borrowers have shifted into panic mode. They worry that they’ll be frozen out of the housing market or won’t be able to refinance.
This reaction from borrowers is understandable, but not always warranted.
The recent rate change is tiny — and it’s important to remember that the current rise is coming out of near-record low rates in August and September.
Relative to the past 40 years, rates are still unbelievably low.
That doesn’t mean buying or refinancing is in the cards for everyone. But some borrowers bending to current mortgage rate fears will miss the opportunity to get bargain-rate financing from eager lenders.
How much are today’s mortgage rates going up?
Mortgage rates rose from 3.57% for the week of October 10th to 3.69% a week later, according to figures from Freddie Mac.
That’s about as big a shift as we’ve seen in recent weeks, given that rates were hovering around 3.55%, even at their lowest points in August and September.
Average mortgage rates are up by 0.12% this week, which is about as big a shift as we’ve seen since rates hit historic lows this fall.
The pillars of real estate financing are feeling the impact of higher rates.
The Mortgage Bankers Association reported that mortgage application volume fell 11.9% for the week. For refinances alone, applications were down by a whopping 17%.
Clearly, homeowners and buyers are thinking they missed the window on this year’s historic low rates.
However, it’s important to put the rate spike in recent weeks into perspective. Yes, rates went up — but how big was the increase? Are rates up for all borrowers, or just some? Did real estate actually become less affordable?
We explore these questions to give you a more holistic look at today’s mortgage rates.
Putting today’s mortgage rates in perspective
The goal is to pay as little as possible for real estate financing. But if rates go up, will your mortgage cost actually increase? Or worse, will it price you out of the home you were hoping to buy?
Let’s take a look at one example.
Mortgage rates just went up about a tenth of a percent — from 3.57% to 3.69%.
If you’re borrowing $200,000 over 30 years, this 12 basis point rise will take your monthly principal and interest payment from $906 to $919. That’s a difference of $13 per month, or $156 per year.
|Monthly P&I payment||$906||$919|
Example assumes a $200,000, 30-year fixed-rate mortgage in Washington. Your own rates and costs will vary. Get a custom rate quote here.
Of course, no one wants to pay an extra $10-20 per month for their mortgage.
But is the difference enough to price you out of a new home or refinance? The answer is likely no.
The myth of rising — and falling — mortgage rates
Mortgage rates rise and fall every day.
Most days, it’s not a big deal. Rates might move a few “basis points” one way or the other, but often the difference is so minor that borrowers won’t feel any effects.
For reference, a “basis point” is equal to 1/100th of a percent. In the October example — when rates went from 3.57% to 3.69% — they moved 12 basis points over seven days.
It’s entirely possible (and entirely common) for rates to move so little that lenders elect to keep retail rates steady. They don’t go up or down. They just sit.
This may seem odd. After all, lenders want the best possible returns. If rates are moving higher, even by a tiny bit, wouldn’t lenders want to up their prices?
While lenders want to turn a profit, they must also contend with lots of competition. If a lender moves rates higher to keep up with an incremental rise in the market, they might lose borrowers to a lower-priced competitor.
Coming in second is not the path to a successful mortgage lending career. Borrowers should make the competition real by shopping around.
Remember, the rate increase is only an average
The mortgage rates in the news reflect broad national averages.
That’s a fair way to consider interest rates in general. However, if widely-publicized rates are an “average,” that means some rates will inevitably be higher — and others will be lower than advertised.
You might be entitled to a better interest rate than the national average if you have a strong credit score, solid reserves, few debts, and a large down payment.
You might be entitled to a better interest rate than the national average if you have a strong credit score, solid reserves, few debts, and a lengthy employment record.
Borrowers can also generally get a lower mortgage rate by making a bigger down payment.
Lenders want to work with reliable borrowers. If you fit the bill, they’ll lower rates in a bid for your business.
Loan products make a difference
So far we’ve been looking at rates for 30-year, fixed-rate home loans. That’s the most common type of financing by far. But there are other mortgages available.
If higher rates really have you down, it might be worth looking into a shorter loan term or adjustable-rate mortgage, which often have lower interest rates (for the first few years, at least).
|30-year fixed-rate loan||15-year fixed-rate loan||5/1 adjustable-rate loan|
|Monthly P&I payment||$920||$1,400||$881|
|Total interest paid over life of loan||$130,998||$51,218||–|
Example assumes a $200,000 mortgage on a home located in Washington. Your own rates and costs will vary. Get a custom rate quote here.
Consider that for the week of October 17th, the average rate for 15-year mortgages was just 3.15%. That’s more than half a percent less than the 3.69% average rate for 30-year fixed loans.
But to get that 3.15% rate, you must be willing and able to make bigger monthly payments. Take this scenario, for example:
If you borrow $200,000 with a 30-year mortgage at 3.69%, your monthly principal and interest payment would be about $920.
Borrow the same amount at 3.15% over 15 years and the monthly cost increases to $1,400. That’s an extra $480 per month. But with a lower rate and shorter term, you’ll almost $80,000 less in interest over the life of the loan.
With a lower rate and shorter term, you could pay almost $80,000 less in interest over the life of the loan.
If your monthly budget is tight, a 15-year loan isn’t the right option. But if you have month-to-month flexibility and want to see bigger long-term savings, this could be the loan for you.
Alternatively, let’s look at a 5/1 ARM (adjustable-rate mortgage). This is a form of financing with a set interest rate for an initial “start” period and then a rate — and monthly payment — which changes each year.
When 30-year fixed-rate mortgages were at 3.69%, borrowers could get a 5/1 ARM at 3.35%. The monthly costs are $920 for the 30-year loan versus an initial ARM payment of $881.
The difference is $39 per month. Is that enough to make a 5/1 ARM attractive, a loan which may have higher or lower payments in the future? That depends on the comfort zone of the borrower and their personal preferences.
Higher mortgage rates may give you leverage
Higher rates may actually give you leverage.
If you’re a real estate buyer, you’ll be happy. Doubtful borrowers leave the marketplace. Less demand can mean lower home prices.
Home sellers may be willing to make repairs, provide seller contributions, or offer other concessions.
Whether you’re financing or refinancing you might also find that the application process is speedier. Why? Fewer applications to clog lender pipelines. You can lock your loan for a shorter period and still close on time. Short locks are cheaper than long ones.
The bottom line: Today’s mortgage rates are higher than last week, but way down compared to last year
For the week of October 17th, mortgage rates averaged 3.69%.
That means mortgage rates have generally increased since early September. Freddie Mac says weekly rates were at 3.49% for the week of September 5th.
However, on a broader scale, mortgage rates are on a downward trend since late last year. In November of 2018, Freddie Mac recorded average rates as high as 4.94%.
Mortgage rates are predicted to stay low in the near future. But if they do move, experts say they’re more likely to go up than down.
So here’s the question: If you finance today, have rates gone up or down?
They’ve risen since by about 0.12% in our example. But they’re down by a much bigger by 1.25% since last November.
And as a final thought, experts predict that rates will stay around 3.7% through next year. But if they do move? Sources say they’re more likely to go up than down.
To lock or not to lock
Don’t sway to panic about small changes in mortgage rates. They may mean no change to you as a retail borrower.
And, sometimes, they might even help your bargaining position if you’re a home buyer or refinancer looking for a good mortgage deal.
Since mortgage rates aren’t expected to go back down anytime soon, you should lock as soon as you get a good rate quote and your closing date is in sight.