3 questions about mortgage rates in today’s housing market

No one has all the answers when it comes to understanding the housing market. Just when you think you’ve figured it out, it throws you a curveball.

Still, you probably have some underlying questions about how today’s conditions can affect your chances of buying a home and getting a mortgage. So let’s tackle a few of the most common questions in this week’s blog.

1 – How do higher interest rates affect home buyers?

Interest rates have a big impact on the home-buying process, and while it might seem intimidating, there are actually some positive aspects to consider.

Financial planning: When interest rates are up, it’s important to dig deeper into your finances and plan more carefully. Take a good look at your budget and think about how higher monthly payments might affect you. By doing this, you can make smarter financial choices and approach buying a home in a more responsible and thoughtful way.

More reasonable expectations: It’s also a good idea to rethink your expectations and look for properties that fit your updated budget. It might narrow down your choices a bit, but it helps you take a more realistic approach to buying a home. By keeping your expectations in check, you can find homes that match your financial muscle, making homeownership less of a struggle than if you buy above your means.

Housing market changes: Higher interest rates can also shake things up in the housing market. When rates go up, it can cool down demand because borrowing money gets more expensive. That could mean that home prices drop or the rate at which prices go up slows down. Sellers might have to lower their expectations and be willing to negotiate. Of course, this depends on available housing inventory.

2 – What makes interest rates tick?

Interest rates are influenced by a slew of factors. One of the big ones is the health of the U.S. economy. Like any other industry, the housing market follows the rules of supply and demand. When lots of folks are itching to buy homes and get mortgage loans, interest rates tend to rise. On the flip side, when the demand for homebuying and mortgages cools down, interest rates usually drop.

Inflation also has a say in pushing up mortgage interest rates. When prices start creeping up, your buying power takes a hit. To make up for it, mortgage lenders might bump up the cost of borrowing, which means higher interest rates for you.

In trying to get inflation under control, the Federal Reserve likes to adjust interest rates ever so slightly. You may have noticed a lot of this over the past year. When the Fed hikes up the federal funds rate, it gets pricier for banks to borrow money and those costs are passed on through rising interest rates.

A few other factors can shake up interest rates, and your behavior is one of them! Things like your credit score, the type of mortgage you’re going for, your credit history, the loan duration and even the kind of home you’re eyeing can all have an impact on the interest rate you’ll be offered.

3 – What are mortgage points?

You can sometimes adjust the mortgage rate down a little bit by paying mortgage points. Mortgage points, also known as points or discount points, are upfront fees you pay to the lender when closing your mortgage in exchange for getting a lower interest rate on your loan.

Typically, each point costs about 1% of the total loan amount. For every point you purchase, the interest rate usually decreases by a certain percentage, usually around 0.25%. The exact reduction may vary depending on the lender and current market conditions.

So, if you’re getting a mortgage of $400,000, a point would cost you $4,000 at closing.

That seems like a lot, but think of it this way: while mortgage points require an upfront investment, they can result in substantial savings over the life of your loan. Paying less interest over time can save you thousands of dollars in total loan costs. And, in some cases, mortgage points may be tax-deductible*.

*Not tax advice. Consult a tax professional.

Before deciding whether mortgage points are right for you, consider the following factors:

  • What’s your financial situation: Look at your financial health and figure out if you have enough money to pay for mortgage points upfront without jeopardizing your other financial goals.
  • How many years will you be in the home? If you plan to sell or refinance your home within a few years, paying for mortgage points may not be worth it. In such cases, the upfront costs may not be recovered through savings from a lower interest rate.
  • When do you break even? Do the math to calculate the breakeven point. This is where the savings from the lower interest rate offset the upfront cost of mortgage points. Your loan officer will help you figure out how long you need to stay in the home to actually benefit from purchasing points.

The effect of higher mortgage rates on first-time homebuyers

Higher interest rates have a direct impact on home buyers and how affordable it is to buy a property. As interest rates go up and down, potential buyers need to stay informed, work closely with mortgage experts, think carefully about their financial situation, check out assistance programs and plan carefully in light of changing interest rates.

First-time home buyers might face some extra challenges when rates go up. They’re usually more sensitive to interest rate changes because they don’t have as much money saved up or as much equity in a home. Higher rates might mean they have to save longer before they can buy a house or look into other ways of getting financing.

Ready to move forward?

We hope this blog answers some of your questions and you’re still planning to find — and own — your dream home.

When you’re ready to start the pre-approval process, or if you have any additional questions about interest rates, contact a local Movement Mortgage loan officer.

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