What Homebuyers Need to Know About Mortgage Rate Fluctuations

In the U.S., average mortgages rates for all types of mortgage loans change constantly. While these fluctuations are usually small, they can make a difference when you’re trying to buy a home. Mortgage rates rise and fall based on numerous factors that include everything from the current rate of inflation to changes the Federal Reserve makes to the federal funds rate.

When mortgage rates are low, buyer interest in real estate spikes. Soon after the COVID-19 pandemic began, the Federal Reserve lowered the federal funds rate to 0% to stimulate the economy, which resulted in banks following suit by reducing mortgage rates to well below 3%. When this occurred, buyer interest increased rapidly since buyers could now purchase homes with low interest rates.

When mortgage rates increase, however, buyer demand can drop off. High mortgage rates can make it challenging for potential buyers to afford their dream home. As for the economy, lower interest rates can cause consumers to spend more of their money, which may lead to a ripple effect across the economy where spending is higher. This article offers a detailed look at mortgage rate fluctuations and what they mean for homebuyers.

What Are Mortgage Rates?

Mortgage rates tell you how much you’ll need to pay in order to obtain a loan. It’s the exact interest that you’ll owe on an annual basis and will be displayed as a percentage of the total loan balance. When searching for the right loan, you’ll have access to adjustable-rate and fixed-rate loan options.

A fixed-rate loan is one where your interest stays the same until you repay the loan. Let’s say that you have a 5% interest rate on a $300,000 loan. In this scenario, you’ll pay 5% of the loan balance each year until you’ve sold the property, paid off the loan, or refinanced your mortgage.

Fixed-rate mortgages are highly advantageous because you’ll know exactly what you’ll pay on every monthly mortgage payment, which makes it easier to create a budget. The only downside is that you would need to refinance to take advantage of lower interest rates.

An adjustable-rate loan provides you with a fixed interest rate for a short period of time, after which the interest rate can vary. Among the most common types of adjustable-rate loans is one where the interest rate is fixed for the first five years. The remaining 25 years of a 30-year term would come with variable interest rates.

The primary benefit of an adjustable-rate mortgage is that interest rates start out low, which gives you time to build your savings and prepare for the variable-rate period. On the other hand, the interest rate on an adjustable-rate mortgage can increase considerably following the fixed period, which may result in your monthly payments increasing as well.

Mortgage rates were at their highest in the early 1980s, which is when they reached their peak of 18.53%. Home values were much lower then, which made it possible for people to afford homes. Since that time, the average rate for a 30-year mortgage has steadily decreased. In August 2000, mortgage rates fell below 8% and have yet to climb above this rate.

Between 2010-2019, mortgage rates fluctuated between 3.5%-5%. It wasn’t until the Federal Reserve dropped the federal funds rate after COVID-19 that the average mortgage rate dropped well below 3%. Once the Federal Reserve started increasing interest rates in 2022, banks responded by doing the same. The average mortgage rate for a 30-year loan reached a high of 7.08% in October 2022. Mortgage rates have since decreased slightly and are now situated at around 6.65%.

Where Are Mortgage Rates Heading?

Mortgage rates for home loans are currently being affected by inflation and the actions that the Federal Reserve have taken to reduce inflation, which can result in mortgage rates being pushed higher. The Federal Reserve once again increased the federal funds rate in early February. However, this increase was only 25 basis points, which is a smaller increase than the ones that occurred throughout 2022.

The Federal Reserve previously indicated that the increases they made in 2023 would be relatively small. Currently, the federal funds rate is situated at a range of 4.50%-4.75%. The Federal Reserve recently stated that they would continue increasing the rate until it reached a target range of 5.25%-5.5%.

Even though mortgage rates are increasing, other economic indicators are strong, which include the labor market as well as average incomes. Borrowing costs will continue to be elevated in 2023 but could start to drop off in the latter half of the year. The Federal Reserve will have another meeting in March, after which they will state what their next moves are going to be.

Trends and Predictions for Mortgage Rates in 2023

Even though 30-year mortgage rates have dropped somewhat in the last six months, buyers continue to be slightly wary about entering the market because of high home values, low inventory, and relatively high interest rates. Mortgage rates jumped around 50 basis points between January and February, which has resulted in less mortgage applications being sent in. Some of the trends that you should be on the lookout for in 2023 include:

• The average mortgage rate should decrease from around 6.6% to 6.2% by Q4 2023.
• Mortgages rates could temporarily increase to the 7% range in March and April before dropping.
• If signs of inflation improve more than expected and U.S. Treasury yields drop significantly, it’s possible that mortgage rates could fall as far as 5% by the end of 2023.
• If raising the debt ceiling continues to be a contentious issue in the government, mortgage rates may remain volatile for longer than expected.

Factors that Will Affect the Direction of Mortgage Rates in the Coming Years

There are many factors that will affect what happens with mortgage rates in the years to come, the primary of which include:

• The Federal Reserve – In the event that the Federal Reserve stops increasing the federal funds rate, mortgage rates could drop substantially.
• Inflation – Mortgage interest rates usually increase when inflation is high, which is largely caused by the Federal Reserve increasing rates to combat inflation.
• Credit – People with higher credit scores can gain access to lower interest rates.
• Geopolitical factors – The state of the global economy can cause unpredictable market fluctuations.

The Role of Government Policies and Interventions on Mortgage Rates

There are times when the U.S. government will intervene in order to influence mortgage rates, which occurs by the government buying bonds and other types of securities in the open market. However, these moves are rare and only occur if mortgage rates are too high and threaten an economic collapse.

What is Affecting Fluctuations in Mortgage Rates?

As mentioned previously, there are many factors that have affected mortgage rates in the past and will continue to do so in 2023. Since inflation is still high, the Federal Reserve won’t make any moves to reduce the federal funds rate in the near future. However, there are some signs that point towards inflation dropping, which may result in mortgage rates dropping as well.

When the economy is growing, there’s more consumer spending as well as higher wages, which means that more buyers will be looking to purchase a home. During periods of economic growth, mortgage rates often increase, which can cause consumer demand to drop slightly when it comes to buying a home.

Keep in mind, however, that buyer demand in the real estate market is still high. Even though mortgage rates aren’t as low as buyers would like them to be, purchasing a home is exceedingly appealing to people who want the security and stability that a home provides.

Bond prices can also cause fluctuations with mortgage rates. When bonds are expensive, mortgage rates tend to be lower, which means that more affordable bonds equate to higher mortgage rates. While more people look to purchase bonds when interest rates are high, there are more bonds on the market at this time, which is why prices drop.

How to Take Advantage of Low Mortgage Rates

If you want to reduce your monthly mortgage payments with low mortgage rates, there are several techniques you can use. The most common solution is to refinance your existing mortgage. In the event that interest rates have lowered since you first sought a mortgage, a refinance allows you to benefit from lower rates. If your credit score has increased since you took out the initial loan, you may qualify for a lower mortgage rate.

Another option at your disposal is to select an adjustable-rate mortgage when buying a home. You’ll start off with a lower mortgage rate for the first five to seven years of the loan term. While your rates will change once the adjustable period kicks in, there’s a possibility that they will decrease.

You can also benefit from a lower mortgage rate by consolidating your debt and paying off any high-interest credit card balances you have. The steps you take to improve your credit score will help you receive a lower rate when you eventually apply for a mortgage with your preferred lender.

Conclusion

Among the most important considerations that you should keep in mind when purchasing a home involves the mortgage rate that you end up paying. If you receive a low mortgage rate, your monthly payments will also be more affordable. Mortgage rate fluctuations occur on a regular basis and can be impacted by everything from government intervention to inflation.

Because of how important mortgage rates are, it’s highly recommended that you keep an eye on them while searching for your next home. While higher mortgage rates might cause you to look for more affordable homes, keep in mind that a mortgage with a higher interest rate can be refinanced into one with a lower rate.