Rising mortgage rates are on my mind as a potential home buyer. When we first started looking for a home last year, rates were below 4%. Since then, they’ve risen to an average of 4.25% as of last week and have continued to rise this week.
This doesn’t mean that rates will continue to rise. Rates have a tendency to move up and down rather quickly as evidenced by the graph below. Recent fed actions have taken the rates higher.
The possibility exists that this doesn’t change anytime soon if the solid economic news is any indication.
Mortgage rates are loosely tied to the 10 yr treasury rate and that has been creeping up. That’s mainly driven by recent fed actions. They’ve taken a policy of raising the short-term fed funds rate and have begun unwinding their bond portfolio. The end of quantitative easing in the form of tightening has sent the rates up.
Rates going up are usually a sign of a good economy and may seem like great news but often those rates can have a negative impact on a variety of things. The recent volatility in the stock market has shown that the market isn’t sure what to make of the rising rates. A solid economy is good but it may turn around if rates keep rising and demand for goods drops. The problem is that rising rates especially without corresponding income increases lead to higher payments.
Higher payments are not great news for anyone looking to buy a home. That’s also potentially not great news for anyone looking to sell a home.
There are two direct impacts of rising interest rates. Mortgage rates drive your monthly payment. That means even small bumps in interest rates can mean a big increase in the lifetime cost of the loan. The second impact is that higher rates may mean lower home prices for those looking to sell their home.
It’s important to put these rates in a historical context. A 4.25% average rate is still well below historical averages. Still, rising mortgage rates will impact your home search. The affordability and home values might change and it’s important to keep that in mind.
I wanted to take a look at where a mortgage payment might go if this trend continues or if it reverses. At the same time, I wanted to see the impact this may have to home prices if this is the new normal. Continue reading “Rising mortgage rates, mortgage payments and home prices”