Higher Mortgage Rates Hurt Buyers

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Higher mortgage rates in 2018, combined with a low number of homes available for sale across the U.S., are hurting buyers. Mortgage rates are higher this year because economic growth has been robust, the unemployment rate has declined, and the Federal Reserve has increased interest rates.

Last year, 30 year mortgage rates were under 4.00 percent for most of the year and finished the year just under 4.00 percent. So far this year, average 30 year mortgage rates increased about 50 basis points. The current average 30 year mortgage rate is at 4.42 percent.

Higher Mortgage Rates Hurt BuyersAlthough mortgage rates are higher this year, rates are not much higher than the all-time lows. Back in 2012, average 30 year rates hit a low of 3.37 percent, about 1.00 percent lower than the current level. Looking back over the past 40 years, these rates are still incredibly low.

About a dozen years ago, just before the Financial Crisis, 30 year rates were around 7.00 percent. Going back to the early 1980s, average 30 year rates were in the double digits hitting an all-time high of 18.45 percent during October 1981. Source: Freddie Mac.

Higher Mortgage Rates Affect Buyers

An increase in mortgage rates does have an affect on how much homebuyers can afford. As mortgage rates move higher, monthly mortgage payments also move higher. For example, on a 30 year mortgage, a 1.00 percent increase in mortgage rates will increase monthly mortgage payments by $55.82 for each $100,000 borrowed.

The monthly payment on a $500,000 mortgage loan with a 30 year rate of 3.50 percent is $2,245.22. The same $500,000 borrowed for 30 years at 4.50 percent will mean a monthly payment of $2,533.43. As you can see on a $500,000 loan, a 1 percent increase in the rate will cost $300 more per month.

You can use our mortgage calculator to calculate mortgage payments: Mortgage Calculator

Mortgage rates will continue to move higher this year because the Fed is increasing the fed funds rate. These increases will send U.S. Treasury yields higher, which in turn will send mortgage rates higher. We expect 30 year mortgage rates to increase to around 5.00 percent by the end of the year.

If you're in the market to buy a home you should lock in a mortgage rate if you haven't already. Many lenders also allow you to extended a lock in period as well. You will pay a fee for an extension but you will probably still save money with a lower mortgage rate.
Author: Brian McKay
May 14th, 2018