Mortgage rates have hit a new high since the onset of Covid – What this means for borrowers – Forbes Advisor
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Mortgage rates are on fire in 2022, up 30 basis points to 3.45% in the first two weeks of January alone – and the highest since March 2020. While rates are still low relative to levels pre-Covid, ever-higher inflation and the Federal Reserve’s attempts to calm it will surely push rates even higher.
Inflation hit the headlines when the consumer price index (CPI) topped 7% for the 12 months ending December – the highest rate since 1982 – driving up the prices of everything from what we eat where we live. To curb rising prices, the Federal Open Market Committee (FOMC) announced that it would withdraw more quickly from its special measures to support the economy, including the acceleration of plans to reduce bond purchases, and also hinted that he might raise the fed funds rate. several times in 2022.
The Fed’s big reveal hammered bonds and the mortgage market. The 10-year Treasury yield – a key benchmark for mortgage rates – rose from 1.52% on December 31 to 1.70% on January 13. The move helped push 30-year mortgage rates from 3.11% to 3.45% over the same period.
As mortgage rates rise, house prices also rise. For homebuyers, they can dictate how much home you can afford. For current homeowners, they decide if it’s still worth refinancing your mortgage.
Higher mortgage rates will make housing more expensive
According to the latest CoreLogic home price index, home prices climbed 18.1% year-over-year in November 2021. The fact that mortgage rates have remained relatively low has been a key financial benefit for buyers in an otherwise exorbitant market. But if house prices continue to rise and rates reach or exceed the 4% range, it could dampen demand, said Jodi Hall, president of mortgage company Nationwide Mortgage Bankers.
“Depending on how big the interest rate rises, we’ll always see demand,” Hall said. “But if inflation pushes up house prices and interest rates, that will put people on the bench.”
Many first-time home buyers might not know what is required to qualify for a mortgage and what they need to get the lowest interest rates available. There are federal and state programs that offer counseling, and experienced lenders can help borrowers through this process.
For borrowers on a tight budget, down payment assistance options are available nationwide. A typical eligibility requirement for most grants and down payment loans is that the applicant be a first-time homebuyer (someone who has not owned a home for three or more years ).
Additionally, for borrowers who may have a limited credit history (credit card or loan payments less than necessary), some lenders will review alternative credit data, such as rental payment history, services public and mobile phone, as well as bank account information, to establish creditworthiness.
Refinancing fades as rates rise
As mortgage rates rise, the number of people who can save money by refinancing decreases, a scenario that is already unfolding.
According to Black Knight, a data analytics firm, 7.1 million people would be eligible for refinancing with mortgage rates at 3.59%. This represents approximately 11 million fewer borrowers based on end-December rates.
Black Knight defines borrowers eligible for refinancing as having a minimum of 720 credit scores, 20% home equity, and the ability to reduce their interest rate by at least 0.75% by refinancing a fixed mortgage of 30 years.
“If the inflation numbers we’re seeing now are real and continue to rise, which most agree, we can expect rates to rise, which will lead to a very different mortgage market in 2022,” says Brandon Snow, Executive Director, Direct to Consumer Origins at Ally. “We could see refinance volume decline by up to 50% from 2021 to 2022, as higher rates will result in fewer homeowners looking to refinance until those rates drop again.”
Martin Choy, chief operating officer at Westwood Mortgage, a Seattle-based mortgage lender, said “refinances have all but dried up as mortgage rates continue to climb.”
Borrowers, however, are still eager to leverage equity, Choy says. But if they have a rate below 3%, they won’t be able to get it now if they refinance in cash, which could mean paying more for the mortgage.
A home equity loan or home equity line of credit (HELOC) are two options to consider for borrowers who want to access their equity without touching their existing mortgage rate.
- A home equity loan is a second mortgage that does not affect your first mortgage. It usually has a fixed rate that can be repaid over 1 to 30 years.
- A home equity line of credit (HELOC) works like a credit card in that you have a fixed amount of credit. Borrowers can use as much or as little credit during the drawing period, usually 10 years. After the end of the drawdown period, borrowers will pay both interest and the principal balance. HELOCs usually have adjustable rates.
Snow says now is the time for borrowers who can save money by refinancing their mortgage.
“All things considered, if refinancing a mortgage is something a homeowner is eager to do, they should act now while rates are still relatively low,” Snow says. “Lock in a favorable rate before any changes that could impact the mortgage market take place.”