If you've turned on the news in the past months, you've probably seen finance experts discuss inflation-driven mortgage rate rises.
Some of these stories warn of interest rates of 15%+, while others estimate modest increases that will only slightly tighten the purse strings of homeowners. Nevertheless, banks are indeed increasing their mortgage rates.
On May 4th, 2022, the Federal Reserve voted to raise the bedrock interest rate to 0.9% . This change went into effect on May 5th, and as a result, many banks increased their mortgage rates. It was the second increase this year—after a 0.25% increase back in March. Further increases took place in June with a rate increase of 0.75% and July and it seems this trend will continue.
Below, we'll cover why mortgage rates have increased and how you can expect these increases to impact you as someone looking to buy a home, refinance, or take out a home equity loan.
Throughout 2020 and 2021, the Federal Reserve kept the interest rate quite low and took other measures (like buying billions of dollars in MBS and Treasuries) to keep mortgage rates low.
In 2022, the economy has started recovering from COVID-19, and the cost of goods and services has increased dramatically with inflation. Part of the Federal Reserve's job is to keep the inflation rate around 2% so that the economy remains stable and prosperous long-term. So, in an effort to keep inflation down, the Federal Reserve has started to increase the interest rate.
Banks don't base their current mortgage rates exclusively on the Federal Reserve's interest rate, but it is considered. When the Federal Reserve lifts the interest rate, banks increase their mortgage rates so they can continue to make a healthy profit from home loans.
Banks are careful about how they increase rates. If one bank were to increase rates by 3% overnight, its competitors would probably end up with an advantage. So, instead, banks increase rates incrementally over several months. This is partially why you can expect to see rates continue to rise throughout 2022.
Mortgage rate increases are a normal and expected part of homeownership. However, they still strike fear into those on strict budgets. Let’s take a look at how another significant rate rise impacted people to understand what may happen.
In 1990 and 1991, the U.S. faced a recession, and the interest rate had remained stagnant since 1989. But, as the economy started to turn around, the Federal Reserve increased this rate to 6%. As a result, banks increased their interest rates.
Though the cost of buying a home increased due to higher interest rates, homes themselves didn't appreciate in value just because rates rose. Data from the Bureau of Economic Analysis shows a weak correlation between mortgage interest rates and house prices. Inflation, however, did make homes more expensive, as inflation has a "strong, positive relationship" with house price growth.
As a result of the 1994 rate rise, people paid more in interest, some buyers were priced out of the market, and people considering home equity loans adjusted their plans. At the same time, inflation also increased property values. And eventually, things did stabilize. We can expect something similar with the current rising mortgage rates, so read on to find out the details.
We don't know the full extent of the 2022 mortgage rate rises yet, and everyone has a different financial situation, so it's difficult to say how the rate rise will impact you and your family.
Here are 7 possible outcomes you might expect to see, however.
This first one is obvious. If you currently have a variable loan, your monthly repayments will increase.
To give you a concrete example of what this might look like, let's say you have $200,000 left on your loan, and your old repayment rate was 3.60% over 30 years. You currently pay $911 a month. If interest rates rose by 3.0% by the end of 2022, you would now need to pay $1279 a month—a $368 increase.
If an increase like this will have grave financial implications for you, there are some things you can do.
You can also switch to a fixed-rate loan. Fixed loans give you security and stability through rate rises.
Or, if you currently have a bad mortgage interest rate with an inferior lender, you can switch to a top lender . You'd be surprised by how much you can save.
If you are looking to purchase a home, interest rate rises may limit your borrowing power. Your borrowing power is how much banks are willing to lend you, and it's determined by factors like your income, credit score, and deposit.
When banks determine your borrowing power, they factor in interest rates. For example, if a bank believes you can afford to repay $1573 a month, you could afford a loan up to $350,000 with an interest rate of 3.50%. If interest rates rose to 5.56%, however, the bank would limit your borrowing power to $275,000.
A decrease in your borrowing power may limit your homeownership options. You may need to reassess the size of the property you are looking for, compromise on price-lifting factors like the number of bedrooms, or hunt for homes in a less pricey neighborhood.
It wasn't difficult to find a competitive offer if you bought a home in 2020 or 2021 when rates were lower. Many banks offered 2-4% interest rates, so even lenders with traditionally higher rates offered good deals.
Now that interest rates have risen, they are less competitive. As a result, you'll need to shop around more and scrutinize your lenders carefully when buying a home. Don't be dismayed, however; plenty of fantastic lenders are out there.
If you are reaching the end of your fixed term or are looking to switch to a better lender, you may be looking to refinance with a fresh interest rate .
However, as rates have risen, the bargain rates that banks offered in 2020 and 2021 are harder to find. As a result, you'll have to look at your refinancing options carefully.
We recommend comparing several lenders and their offers to find the best mortgage rates you can. Don't just take the new rate your current lender offers.
The low interest rates of the past two years made homeownership possible for many people who would otherwise have been priced out of the market—including people with lower incomes and minimal deposits.
Consequently, the market was flooded with buyers and investors looking to take advantage of great rates. In many areas, buyers started forgoing building and pest inspections, paying well above the asking price, and making offers before viewing a home.
As those great rates no longer exist, many of those buyers are no longer shopping for homes.
Depending on your area, this could mean that there is less competition for homes. Less competition means that you can make conditional offers, offer a lower price, and take your time assessing the home before making an offer.
As your life, family, and priorities change, your housing needs may change too. As a result, you might look at renovating your current home using a home equity loan. Home Equity Line of Credit (HELOC) loans allow you to borrow against the value of your property.
Home equity rates have also risen with interest rates. For some people, this rise doesn't impact their plans, but for others, it may make the cost of home renovations unaffordable. If you've been considering getting a HELOC loan, you'll need to estimate the cost of the loan with tomorrow's higher repayment figures. You can find the best home equity loan rates here .
One silver lining is that home values have also gone up with inflation, so if you already own your home or are close to paying it off, you may be able to tap into that higher value with a home equity loan.
If you're considering doing so, you may want to shop around for other loan options before taking out a HELOC loan. You maybe be able to save thousands a year by switching lenders.
Many lenders offer VA loans to veterans, service members, and some military spouses. These loans have low deposit requirements, no Private Mortgage Insurance (PMI), and lower rates.
Although they will remain the best mortgage rates for homeowners, fresh VA loan rates and VA refinance rates will still increase as rates rise. So, those eligible for a VA loan may seek to use their VA loan opportunities ASAP to secure a good interest rate before rates rise further.
We've already seen rates rise this year. In January, the average 30-year fixed mortgage rate was 3.45% , and by April, this rose to 4.98%. The Federal Reserve has also put the interest rate up—so it's likely that rates will continue to rise.
As rates rise, buyers will have decreased borrowing power, homeowners will have higher monthly repayments, and home equity loan rates will rise, leading to a need for those wanting to borrow against their property’s value to scrutinize their plans carefully.
To handle the rate rise with ease, make sure you shop around. There are many competitive lenders and mortgage rates out there. You only need to look for them.