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Are Mortgage Rates Going Up? Yes. But Here’s Why You Shouldn’t Panic.

Are Mortgage Rates Going Up? Yes. But Here’s Why You Shouldn’t Panic.
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Home.com Contributor

Mortgage interest rates aren’t exactly a hot topic of conversation – at least, they weren’t until the coronavirus pandemic. Then came 2020, when mortgage rates plummeted to record lows, and suddenly rates were of great interest. After all, low rates mean less expensive mortgage payments and the potential to afford more house.

Now mortgage rates are rising, and that’s got some homebuyers spooked. Maybe you’re among them and you’re wondering whether you missed your shot at a great rate. Perhaps you’re even thinking you’ll sit the next few months out and hope rates drop again.

I’m going to tell you why neither of those is the right option – and why right now is still a tremendously favorably interest rate environment to buy a home.

What's in this Article?

Why are mortgage rates going up?
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What do rising rates mean for first-time homebuyers?
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Should you buy a home in 2022?
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Why are mortgage rates going up?

During the coronavirus pandemic, the demand for mortgage-backed securities (MBS) skyrocketed. Investors favor MBS during economic uncertainty because they’re considered safe investments – and few periods in recent history have been more uncertain than the pandemic. The high demand for MBS drives mortgage rates down.

Furthermore, the Federal Reserve bought up tens of billions of dollars worth of MBS keeping rates low and encouraging lending and spending.

Mortgage rates are still excellent by historic standards. And that means borrowers can still get home loans at very affordable rates.

Two years on, the Fed has announced a slowdown in its MBS purchases, spurring regular MBS investors to do the same. As demand for mortgage securities drops, interest rates increase.

If all of this sounds a little inside-baseball, here’s the takeaway: The pandemic was a unique economic event that drove down interest rates. As the economy recovers and the world finds a new normal, mortgage rates are increasing.

But here’s the good news: Mortgage rates are still excellent by historic standards. And that means borrowers can still get home loans at very affordable rates.

Learn more: Mortgage Rates are Rising – Here’s What Homebuyers Should Know

Mortgage interest rates are rising. What does that mean for first-time homebuyers?

If you’re a first-time homebuyer, hats off to you. This housing market has been a tough one, as many buyers have experienced. The demand for houses has driven real estate price hikes throughout the country, and bidding wars and cash offers have made it tough to compete.

My message to you, though, is this: Stick with it. Despite all the headlines about rate increases, high home prices, and speculating about a housing crash (which is highly unlikely), this is a prime time to buy a home.

Putting mortgage rate increases in perspective

Consider the historical context. Since the 1980s, rates have continuously been coming down. So there are two outcomes of that trend: Will it continue to go to zero? Probably not. Or are we likely to see an adjustment where rates go up? The latter is the more likely scenario.

Mortgage rates 1980 to present. Image from Freddie Mac Primary Mortgage Market Survey.

But “going up” doesn’t mean spiraling out of control. In the late 1990s, 8.7% was considered a competitive mortgage rate – I know because that’s what I paid on my first home. Today’s rates are much lower than that, and even with modest hikes, we’re unlikely to see those 90s-era rates anytime soon.

Of course, predicting interest rate fluctuations is difficult, and we can’t say for certain what will happen. But most expert predictions see rates reaching around 4% by the end of this year, which is a great rate on a home. Even at 5%, you’re still looking at a very affordable housing market.

Despite all the headlines about rate increases, high home prices, and speculating about a housing crash (which is highly unlikely), this is a prime time to buy a home.

Adjust your mindset

So, don’t be put off by vague terms such as, “rates are rising” or “mortgage rates are increasing.” Yes, they are. But specifics matter. And in this case, the specifics still favor first-time homebuyers.

Having said that, you may need to adjust your mindset around buying a house. A lot of people go into their home search looking for that forever home. But in this market, the forever homes get snapped up really quickly, especially in areas where many buyers are offering cash.

Rather than holding out for a forever home, look for a great starter home, one you can live in for the next three to five years at least. They’re called starter homes for a reason: they can serve as stepping stones toward that dream house in a few years.

If you buy a home now, you’ll start building equity – the foundation of wealth creation in the U.S. As your equity grows, you can leverage that into other wealth-building options, including buying another property. But you have to start somewhere, even if it’s not quite what you envisioned at first.

Your lender can be your ally in this. My team and I work with borrowers to become homeowners now so they can gain experience with having a mortgage and managing a property, knowing that they will move up to that dream home down the road. We help them create a strategy that makes the most of their opportunities in the current mortgage market so that they have more options in the future.

That’s the approach I recommend for all first-time homebuyers. If you’re ready to buy but you’re not able to afford your dream home right now, shift your focus to homes within your price range and the possibilities they represent.

Should you buy a home in 2022, even if mortgage rates are going up?

You should buy a home when you’re ready to buy a home. I never advise homebuyers to try to time the market. I don’t even try to time the market myself, and I’ve been in the mortgage industry for 28 years!

We know what we know now. We don’t know what’s going to happen in the future. Will rates rise? By how much? Will housing prices continue to spike? Experts can make an educated guess about these questions, but no one can say for sure.

You should buy a home when you’re ready to buy a home.

What you can do is make the best possible decision with what you know right now. And what we know now is that rates are excellent. Waiting to buy in the hopes that rates will drop could cost you tens of thousands of dollars in interest over the life of your loan, and it could mean that you’ll be able to afford less home.

Your interest rate affects how much you can borrow, since it influences your monthly mortgage payment. Typically, a lower rate means a higher loan amount. So, buying while rates are low allows you to save money and build equity – two key strategies for building wealth.

Keep in mind that interest rates also depend a lot on your finances. You can look at average rates to get an idea of where the market is, but your mortgage rate will depend on your credit score, down payment, and other aspects of your financial profile. The higher you can get your credit score, and the more money you have saved toward a down payment, the more competitive a score you may be able to get.

Learn more: Raising Your Credit Score Can Save Thousands in Interest. Here’s Why

A great time to buy

If you’ve been worried about rising mortgage rates, take heart. Now is still a great time to buy, and you can still qualify for really good rates.

But you have to focus on your finances and your homebuying ability, rather than worrying about what rates were last week versus this week or what housing prices might do.

If you’re ready to buy a home, the best thing you can do is forget what you’re seeing in the news and talk to a mortgage lender. We can tell you how much you can afford and what loan programs are available to you, and we can help you make a plan for buying a house that makes you happy.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.

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