Soaring mortgage rates create new urgency for homebuyers

Just when it looked like the housing market was returning to some semblance of normality, Americans have a new reason to buy now. Mortgage rates are rising sharply, and that trend has prompted homebuyers to try and lock in their loans now.

“There’s definitely an urgency pushing buyers into the market,” says Andy Sachs, a Keller Williams broker in Newtown, Connecticut. “Some of these buyers had been looking for a year. We are again witnessing bidding wars.

The Mortgage Bankers Association said Wednesday that applications for purchase mortgages rose nearly 8% in the past week. (In contrast, refinancing applications have fallen.) The surge in mortgage activity ahead of the spring homebuying season reflects homebuyers’ sentiment that historically low mortgage rates are fading.

The average rate on a 30-year mortgage rose to 3.75% as of January 19, from 3.4% two weeks earlier and 3.27% three weeks earlier, according to Bankrate’s national survey of lenders.

Katie Severance, an agent at Douglas Elliman in Palm Beach, Florida, advises her clients not to hang around — and she’s taking that advice herself. Severance and her husband are under contract to buy a house in South Florida.

“We were going to wait until spring and decided to raise them because of interest rates,” said Severance, author of “The Brilliant Homebuyer: 101 Tips for Buying a Home in the New Economy.” “The general rule is that for every one point increase in mortgage rates, your buying power drops by almost 10%. So if you buy a $500,000 house and interest rates go up by one point, you can only afford a $450,000 house.

It’s unclear exactly how rising mortgage rates will affect house prices over the long term.

“The first few months of rate hikes are showing mixed results,” said Lawrence Yun, chief economist at the National Association of Realtors. “Some want to buy early before rates rise further. Others are overpriced because the prorated monthly payment no longer works in their finances. So home sales could go either way.

In Connecticut, Sachs hears from potential sellers who want to put their homes on the market before prices drop. “They don’t want to miss the boat either,” says Sachs.

Rising rates could be a budget breaker

Historically low mortgage rates were one of the factors pushing home prices to new highs in 2020 and 2021. For now, however, rising rates are expected to intensify affordability concerns.

“Spiking mortgage rates, coupled with soaring house prices, will drive more first-time buyers out of the market,” said Greg McBride, chief financial analyst at Bankrate.

Due to soaring prices, it is becoming increasingly difficult for Americans to afford a home. Only 56.6% of homes sold in the third quarter were affordable for families earning a typical income, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.

Meanwhile, a sharp rise in home prices since the start of the pandemic means homebuyers are facing bidding wars and sticker shock.

“Even with rising rates, getting a mortgage approved is the easy part,” McBride says. “Finding a place in your price range and not overbidding remains the biggest challenge homebuyers face. Resist the urge to go beyond what you can afford just to get into a house. The novelty of the new home will fade, not the mortgage payments.

What to consider if shopping for a mortgage

  • Shopping is crucial. Getting at least three offers can save you thousands of dollars over the life of your loan. As you analyze your options, compare interest rates and the annual percentage rate, or APR, which is more reflective of the total cost of the mortgage. Some lenders may advertise low interest rates but offset them with high fees, a tactic revealed in the APR.
  • Get your credit score in order. Your credit score is the most important factor in determining your mortgage rate. The best deals generally go to borrowers with credit scores of 740 or higher.
  • Do your homework. Compare offers online, read lender reviews and go directly to lender websites. If you have a relationship with a lender, bank or credit union, find out what interest rate or customer discount you may be eligible for. Often, lenders will work with customers to get them a better deal than they would otherwise get elsewhere.
  • With rising rates, you might consider paying points. Mortgage points are the fees a borrower pays to a mortgage lender to reduce the interest rate on the loan. This is sometimes called “buying low”. Each point the borrower buys costs 1% of the mortgage amount. So a point on a $300,000 mortgage would cost $3,000.
  • Don’t think too much. Although you should pay attention to the ups and downs of the mortgage market, your best decision if you need a home loan is to get a rate that suits your budget and goals. Don’t be forced into a deal that doesn’t meet your needs just to save a little on mortgage interest. Rates are still very low by historical standards.

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