While average mortgage rates fluctuate daily and the rates offered to individuals vary according to multiple factors, they have remained historically low for a year and often dip below 3 percent.
While those rates are still extremely low by historical standards, rising mortgage rates do have an impact on buyers, particularly first-time buyers and others in high-cost housing markets who face affordability challenges.
We asked Dale Baker, president of home lending at KeyBank in Indianapolis, for advice for buyers if mortgage rates rise.
“Rising interest rates will have an impact, but we still expect a very strong year in home lending,” Baker said in an email. “For home buyers, purchase mortgage interest rates are still near historic lows.”
Baker believes that rising home prices might be a more significant barrier to buyers than rising interest rates.
“In many markets home prices have risen approximately 10 to 15 percent year over year, which is more impactful than the increase in available interest rates,” he wrote. “Inventory is also incredibly tight based on historic standards.”
First-time buyers and rising rates
Buyers are advised to meet with real estate and mortgage experts to understand the impact of potentially higher rates, particularly in today’s fast-paced market, Baker wrote.
“Our mortgage loan officers meet with our clients in person and virtually to understand a client’s objectives, including how long they plan to live in the home, how much payment flexibility they want and how expensive of a home they can afford,” Baker wrote.
“These conversations help the mortgage loan officer and client work together to choose the best loan solution to accommodate each client’s needs.”
The potential impact of rising rates and rising prices on buyers will vary. For some buyers, a slightly higher payment can be absorbed into their budget, while others may have difficulty qualifying for a loan or may need to lower their price range.
For example, Baker wrote, for a $500,000 home with a 20 percent down payment, the difference in monthly payment between a 3.5 percent mortgage and 2.75 percent mortgage is approximately $165. However, the impact of a price increase of 10 percent would mean that $500,000 home would now cost $550,000, he wrote.
“If you are putting 20 percent down, that means you need an additional $10,000 for the down payment and you would need to finance an additional $40,000,” Baker wrote. “If rates were flat at 2.75 percent, that $40,000 would cost an additional $163 per month just due to the increased price. If your mortgage rate rises to 3.5 percent, it would add another $180 to your payment on a 30-year loan. That means that many buyers are facing additional expense not only from the rising rates, but also from appreciating prices.”
One option for buyers who are concerned about paying a higher mortgage rate is to “buy-down” their rate by paying points on the loan at the closing, Baker wrote. A point is equal to 1 percent of the loan amount.
“For purchasers who plan on remaining in their home for a longer period of time, this may make sense,” Baker wrote. “But home buyers should be aware that currently available interest rates are still very attractive by historic standards.”
Your lender can advise you when to lock-in your mortgage rate depending on where you are in the home-search process.
“We do not recommend trying to time interest rates day by day to lock in at the lowest possible point,” Baker wrote. “Not even mortgage experts can predict what is going to happen with rates today, tomorrow or next week. If you find a home you love and are comfortable with the financing, it may not be a good idea to gamble with what interest rates or prices are going to do tomorrow. The stress of buying a new home can be enough. Worrying every day about timing a mortgage lock will only add to that stress.”
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