So here we are, smack in the middle of the busiest season for the residential real estate market. With all the activity, shoppers are already facing challenges in finding their ideal home. Now, they’re starting to face a new one: rising mortgage rates.
Although the health of the real estate market has much improved this year, thanks to a better labor market and the end of the foreclosure crisis, the situation isn’t as good for the home buyer. The number of people looking for homes is outpacing the growth in inventory of both new and existing homes. In April, the No. 1 problem in home buying reported by active shoppers on our site was simply finding a home that met their needs.
Mortgage rates have remained low since the housing crisis of 2008, but we’ve been warning consumers since the end of 2014 that rates would go up in 2015. Fixed-rate mortgages are now 30 to 40 basis points higher than the lows for the year. But “I told you so” doesn’t help someone trying to determine what to do.
A basis point is 0.01 percentage point. That may sound confusing, but it’s an easy way to discuss the difference between two rates. For example, if the rate for a certain type of mortgage was 3.50%, and it went up to 3.75%, the difference would be 25 basis points.
The financial math is straightforward: A higher mortgage rate will increase the monthly payment when all other factors remain the same. An increase of 10 basis points (0.10) in an interest rate adds 1.2% to the monthly payment. And a higher payment will affect qualification ratios, potentially limiting what you can buy.
The increase in fixed rates that we’ve seen so far would result in about $ 40 added to the monthly payment on the purchase of a median-price home with 20% down.
That increase is not minor, especially for a median- or lower-income household. Home buyers could limit the increase, or avoid any increase, by doing a bit more research and considering financing alternatives.
One tactic for lowering the monthly payment is paying upfront for a discount point, which is knocked off your mortgage rate. Economists like to say “there’s no such thing as a free lunch,” and that’s true here, too. By paying a discount point, you are basically buying a lower rate but increasing your upfront fees. The cost of a point varies depending on your market, but 1% of your mortgage amount is not uncommon. But this approach could be worth it if you have the funds for closing and you intend to hold the mortgage long enough to recoup the upfront investment.
Another approach would include taking advantage of alternative hybrid mortgage products with lower rates. Indeed as rates have been rising, the share of adjustable and hybrid mortgages that only have fixed rates for a defined period, such as one year or up to 10 years, has been on the rise.
But you also might be able to get a lower rate just by shopping around. Realtor.com’s mortgage rate page and mobile app can get you started. An expert local mortgage broker would be of great help in working through options and the financial trade-offs between various products that are available to you.
Also, take heart that the reported average rates are not necessarily what you can get on the market. Mortgage rates are very personal and very local. The rate you end up with is a function of the market overall, local market conditions, the type of property, the type of mortgage, and the financial profile and credit history of the borrower.
To give you a perspective of rate differences around the country, even though the average 30-year fixed conforming mortgage across the U.S. is now above 4% again, in Washington, California, Illinois, Georgia, and Massachusetts the average is still under 4%.
We are forecasting even higher rates by the end of the year, so what you’ve seen in recent days is likely just the beginning. By knowing your options and staying informed, you can still take advantage of what are still very low mortgage rates.