With the recent jump in mortgage rates, some would-be home buyers are wondering what the higher rates will mean for their purchasing prospects.
Throughout 2016 rates on 30-year mortgages have remained under 4 percent or even 3.5 percent. In the remaining weeks of the year, however, rates on 30-year mortgages have steadily increased into the 4 percent range.
With an improving economy, experts tell home buyers to expect above 4 percent to be the new normal. Inflation is on the rise and with it long-term interest rates are likely headed up. In fact, the Federal Reserve recently raised the all-important federal funds rate at its December meeting and likely will increase the rate several more times in 2017. While the Federal Reserve doesn’t directly control mortgage rates, many economists agree the higher rates are here to stay and may tick up even more.
Jonathan Smoke, chief economist for Realtor.com, expects mortgage rates to be around 5 percent before the end of 2017, according to a mid-December blog post. While rates should stay stable for now (around 4.2 percent for the next two months) they are likely to tick up before Federal Reserve meetings, he said.
“But as the year progresses, rates are more likely to move,” Smoke wrote. “Mortgage rates are most likely to move in the month ahead of each key Fed policy meeting. The most important meetings are in March, June, September and December [2017] — so home buyers, mark your calendars!”
Similarly, the National Association of Realtors expects rates to increase throughout 2017 and be around 4.6 percent by the end of the year.
For buyers who are getting ready to make a home purchase, acting sooner could save them money in the long run. Smoke calculated the payment on a median-price home could increase by about $100 a month if rates go from 4.2 percent to 5 percent. For some buyers, that might mean choosing a lower-priced home in order to make up the difference.
Nevertheless, it’s important to remember that a 5 percent mortgage is still very low compared to historical standards. Ten years ago, 30-year interest rates were above 6 percent.
The rising rates are also a good reminder to be a smart consumer and to shop around for a mortgage just as you would any other product or service. Here are some tips for reducing your mortgage costs.
First, don’t go with the first loan you’re offered. Shop around and compare mortgages and lenders. The Loan Estimate you receive when you apply allows to you easily compare the rates and fees from one lender to another. Not all loans are the same, and you can save a lot in the long run if you take the time to shop around. The process can be confusing so check out the ConsumerFinance.gov Know Before You Own website to learn more.
Second, you may want to look into loan options in addition to a 30-year fixed-rate mortgage. If you plan on staying in the home for less than 10 years, a loan with an adjustable rate could save you money in the form of lower interest.
Third, consider buying down your rate — or ask the seller to. If you’ll be in the house long enough, you might save more money in the long run by paying upfront to reduce the interest rate over the life of the loan. You’ll want to do the math to see if it makes sense.
You can also ask the seller to buy down your interest rate; however, you’ll want to talk to your Realtor about market conditions and your negotiating power before using this tip.
Finally, you’ll want to make sure your credit score is in order. Those with high credit scores will pay less than those with a flawed credit history. Take the time to review your credit report and make sure it doesn’t include any inaccurate information that could hurt your score.
With higher financing costs, it will be important for you to have a local Realtor negotiating the best price possible on your new home. Learn more and find a directory of Northern Wasatch Realtors by visiting NWAOR.com.
Jed Nilson
2016 President, Northern Wasatch Association of REALTORS®