Q & A: Why the rapid increase in mortgage rates?
Mortgage rates recently climbed to their highest levels since before the pandemic.1 What does that mean if you’re thinking about buying a home or refinancing your current one? Max Vosburgh, SVP, Secondary Market Manager, Commerce Bank Mortgage, shares insights and answers some common questions related to rising mortgage rates and what it could mean for your finances.
Q: How are interest rates set or established?
Answer: There are two primary levers that impact how mortgage rates are determined: the broad economic market, which is influenced by the overall health of the economy and investor demand, and individual factors. Individual factors that can impact interest rates and cause them to fluctuate can include the characteristics of a loan application, such as property type, loan purpose or the borrower’s credit score.
Q: Why did interest rates jump so fast?
Answer: As a general rule of thumb, when the economic outlook is healthy, the cost of borrowing will increase, and when it’s not as favorable, it will decrease. In March of 2020, when the economy faced unprecedented coronavirus-related disruptions, the Federal Reserve lowered borrowing costs to provide an economic stimulant.
In 2022, we find ourselves in the opposite situation. The economy has rebounded faster than many predicted, and increased consumer spending, growing wages, and a rising demand for goods have helped pushed inflation to its highest level in decades. The Federal Reserve is raising interest rates in an effort to pump the brakes and properly manage the rate at which the economy grows.
Q: Are mortgage interest rates impacted by inflation?
Answer: Inflation measures the rate at which the price of goods and services increase over a period of time. While mortgage rates aren’t tied directly to inflation, they’re influenced by it, as the cost to borrow money typically rises as the rate of inflation increases.
Q: Is now a good time to buy a house before interest rates increase even more?
Answer: Mortgage rates are only a single ingredient in the entire recipe that someone should consider when evaluating homeownership. First, and most importantly, create a budget and identify your comfort level with a monthly housing payment. Be sure to factor in other expenses like property taxes, insurance, maintenance and repairs. Keep in mind that differences in the loan type, down payment amount and repayment term can provide flexibility in designing a monthly payment that fits your budget.
Prospective homebuyers should also weigh the wealth-building benefits of homeownership against their current housing costs and overall financial picture. Many people may be surprised to discover that with the right loan option, owning versus renting can result in a lower monthly payment — and there may even be tax benefits. Another silver lining? Higher rates may put pressure on sellers to lower their home price, which helps buyers.
Q: Will mortgage rates change again soon — and how will that impact my monthly payment?
Answer: Despite the recent spike, mortgage rates remain at historically low levels, which is good news for homebuyers. However, it’s important to note that any number of economic and geopolitical factors could cause rates to shift, such as the instability in Europe, or a new coronavirus strain, making it difficult to predict what might happen with mortgage rates in the future. If you’re concerned about rate movements and how that might impact your budget, talk to your mortgage banker.
While rising rates may seem dramatic, it’s important to put into perspective how a 1% or 2% rate difference could impact the monthly payment on your long-term investment. The example below shows what a 1% or 2% interest rate difference looks like for a monthly principal and interest payment, based on a $250,000 home purchased with a 20% down payment for a home loan of $200,000 with a fixed-rate 30-year loan.
|Mortgage Rate||Monthly Payment|
To see more examples of how different interest rates and loan terms can impact your monthly payment, check out Commerce Bank’s calculators. They’re a convenient tool that lets you quickly compare payments between different loan types and loan terms to determine monthly payments.
Q: What steps can I take to get the best mortgage interest rate?
Answer: The following tips can help you navigate a rising rate environment to get the best mortgage for your needs and your finances.
- Review your budget to determine how much house you can afford and to identify a manageable monthly house payment
- Pay down debt to lower your debt-to-income ratio and to create more room in your budget for housing costs
- Consider making a larger down payment so you can borrow less
- Consider lowering your monthly payment by buying points at closing
- Explore different repayment terms and mortgage loan options, such as a fixed rate versus an adjustable rate
- Check your credit report and credit score — the stronger the score, the more likely you’ll qualify for the most competitive interest rates
Focusing on your budget, your needs and your goals can help you make the best decision for your situation in any type of interest rate environment. Learn more about Commerce Bank home loan options and resources or contact our Mortgage Concierge Team at 816-760-3663 for answers to your questions and guidance on choosing the right home loan to fit your financial plan.
- “Mortgage rates soar past 4%,” Gabriella Cruz-Martinez, personal finance writer, yahoo! finance, posted March 17, 2022, https://finance.yahoo.com/news/mortgage-rates-soar-past-4-percent-143733545.html