3 Factors Affecting Mortgage Rates – And What To Do About Them

If you’re in the market for a new home, there are many things to keep in mind. While you may have a large number of items on your wish list, your goal is ultimately to find a home you love in the right neighborhood at a price you can afford. And one of the biggest factors that affects affordability is how much a mortgage will cost.

Mortgage interest rates Been high for a while now. Until July 21, 2023, Bankrate reports that the average rate for a 15-year mortgage is 6.30%, while the average rate for a 30-year mortgage is 6.88%. That’s lower than last week’s rate but still nowhere near where homeowners would prefer. And Experts hope Rates will go back up, possibly closer to 8% next month.

Why does this happen, and what can home buyers do to combat it?

See today’s top mortgage rates here.

3 Factors Affecting Mortgage Rates

Three big things that have led to today’s high mortgage rates:

High inflation

“The most important factor influencing current rates today is the Fed’s inflation-fighting rate hike campaign,” said Peter Idziak, senior associate at Polunsky Beitel Green. “The Fed has raised the discount rate from 0% to around 5% over the past year and a half, making it more expensive for mortgage lenders to borrow. Banks and mortgage bankers must pass these higher borrowing costs on to borrowers through higher mortgage rates.”

Demand for mortgage-backed securities is low

Mortgage-backed securities (MBS) are assets that are bought and sold like stocks. These securities are backed by a pool of mortgages, which investors buy from the issuing bank at a higher price than they can lend.

The more demand there is for MBS, the higher the price and the more leverage lenders will have, enabling them to offer lower rates to borrowers. Recently, demand for MBS has slowed, and banks have raised rates accordingly.

“What makes buying MBS an attractive option for investors is the state of the stock market as it is a competitive investment vehicle and economic factors such as inflation,” said Darren Tully, senior loan officer at Cornerstone Financial Services. “Inflation causes interest rates to rise, which reduces the value of a bond, making it less attractive.”

Prepayment risk

Banks make money from mortgages by collecting interest on borrowers’ repayments. When rates fall — as they’re expected to do early next year — more borrowers refinance their mortgages at lower rates.

It costs the bank interest if the borrower uses the full repayment period. To recoup some of these losses, banks set higher mortgage rates.

Compare your mortgage options online now.

What Home Buyers Can Do in Today’s High Mortgage Rate Environment

There isn’t much you can do to influence the overall economy and housing market Steps you can take Get the best rate possible today. These include:

Shop around

“According to the CFPB, only about half of all potential borrowers seriously consider one lender, potentially costing them hundreds of dollars a year,” Idziak said. “Mortgage rates can vary by as much as one-and-a-half percent between lenders, and some lenders may have lower fees than others, so potential borrowers should consider several lenders before committing to one.”

Tooley agrees. “The most important thing to make sure you’re getting the best mortgage possible is choosing the right lender to work with from the start,” he says. “Prospective homebuyers should talk to at least two or three different companies before deciding who to hire.”

You can start by looking at current mortgage offers here.

Make a big down payment

most of Lenders need A down payment of 20% of the home’s purchase price, but some accept as little as 3%. However, the lower your down payment, the more you’ll pay over time, which can be especially expensive in a high mortgage rate environment.

“Making a larger down payment lowers the total loan amount and lowers the interest rate,” Robert Esposito, director of sales at RelatedISG Realty, said recently. CBS News. “This makes you eligible for better loan terms or even to avoid private mortgage insurance altogether.”

Consider an adjustable rate mortgage (ARM).

With a way to get around a higher mortgage rate Adjustable Rate Mortgage (ARM). ARMs start at a low rate that lasts for a fixed term, after which the rate changes based on current market rates. “ARMs are a good way to lock in a low rate for a period of time,” says Craig Toberman, CFA, CPA, CFP, founder of Toberman Wealth.

That said, it’s not the best choice for everyone. Toberman continued, “[ARMs] Risky because once the fixed term expires, your rate may double or even triple. The key to success with an ARM is to try to anticipate how long you will be living in your new home. If you have a seven-year ARM, and you want to sell your home and move within seven years, an ARM can be an excellent choice for you, especially in today’s environment where rates are rising quickly.”

Bottom line

The economic woes of the past few years, largely driven by high inflation and interest rate hikes designed to combat it, have resulted in high mortgage rates that are likely to remain around for some time yet.

Fortunately, there are things home buyers can do Get the best rates And the terms they can in the current interest rate environment. Shop around, compare your mortgage options and consider making a larger down payment, and you can still secure your dream home without spending more than you need to.