If you’ve been awake at any time over the past few weeks, you may have noticed that mortgage rates aren’t as low as they once were. What gives?
Well, one downside to a strong economy is higher inflation expectations, and that has sent the 10-year bond yield surging to its highest level in four years.
This is good news for savers, but bad news for those looking to borrow money.
Put simply, long-term fixed mortgage rates tend to follow a similar trajectory, and as such, they’ve increased 33 basis points (0.33%) since the start of 2018.
The popular 30-year fixed, which stood at 3.99% to end 2017, quickly catapulted to 4.32% in a matter of about a month, per Freddie Mac data.
[See today’s mortgage rates from dozens of lenders, updated daily.]
While it’s certainly not the end of the world, it’s more unwelcome news for prospective first-time home buyers looking to buy a home in 2018.
The Home Search Is Already Long
Apparently, most wannabe home buyers are spending three months or longer to find a home, according to a recent survey from the National Association of Home Builders (NAMB).
And the number one issue is a lack of affordability, with a 42% share of the responses. The higher mortgage rates certainly won’t make that problem go away, especially if you consider the mad rush to buy a home in a rising rate environment.
It’s also really bad news for mortgage lenders that rely most on refinancing, as higher rates mean fewer existing homeowners will benefit from one.
Banks Still Offering Sub-4% Fixed Mortgage Rates
But wait, banks and mortgage lenders are still offering 30-year fixed rates below 4%. How is that possible given this really bad month we’ve had?
Well, you really need to start paying closer attention to the advertised rates you see. Specifically, you need to look at the associated loan costs to obtain said rate.
If a bank is still willing to offer you a rate of say 3.99%, or even 3.875%, there’s a very good chance you’ll be paying mortgage discount points. And that might be plural.
The magic of discount points is that they’re prepaid interest, so if a borrower is able to pay a little bit upfront, they can reduce their interest expense while they hold the loan.
For example, a mortgage rate of 4% a month ago may have required nothing in the ways of points. Today, it might require one or more points.
On a $300,000 loan amount, that’s an additional $3,000 in closing costs per point. Sure, you might still be able to get that low rate you wanted, but there’s a strong likelihood it won’t be free anymore.
Stay Within Budget to Keep Options Open
For those lacking down payment funds and/or money for closing costs, this won’t be an option. Instead, you’ll be at the mercy of the higher interest rates on offer that come at par, aka without points.
Of course, this isn’t necessarily a problem if you give yourself room in terms of what you can afford and buy a home in your price range.
If a mere shift in rate of a half point can make or break you, it might be prudent to look at cheaper properties.
Additionally, when paying mortgage points, it’s always important to see how much the lower rate actually reduces your payment. And while you’re determining that, you’ll want to ballpark how long you plan to stay in the property.
The benefit of a lower rate increases with your tenure, but can be much less beneficial if you turn around and sell or refinance after just a few short years.
The takeaway is that those who stay within budget still have plenty of options to land a low mortgage rate, despite the recent increase in rates.