“Expect 7% as the new normal” for mortgage rates, says Lawrence Yun, chief economist at the National Association of REALTORS®. That could make affordability even more challenging for buyers who are still facing elevated home prices, too.
As Lisa Sturtevant, Bright MLS chief economist, says mortgage rates remaining “stuck at or above the 7% threshold” could create a psychological and financial barrier for buyers.
The average rate on the 30-year fixed-rate mortgage reached 6.95% for the week ending Sept. 17, according to Freddie Mac’s national survey. But daily lender trackers are putting rates above 7%: Mortgage News Daily reported 30-year rates hit 7.24% on Thursday.
The Federal Reserve raised its key benchmark rate by a quarter percentage point this week, its first rate hike in three years. But that doesn’t mean mortgage rates move in lockstep with the Fed. Mortgage rates are influenced more directly by broader financial markets and long-term bond yields. The 10-year Treasury yield, a key indicator for mortgage rates, recently climbed to its highest level in nearly two decades, adding pressure to borrowing costs.
Related: Contract Signings Barely Budge, as Mortgage Rates Take Center Stage
Breaking Down the Cost of 7%
Higher rates can translate into a larger monthly payment and less purchasing power for buyers.
“For buyers, the move back above 7% is real money,” says Eric Bernstein, president and co-founder of LendFriend Mortgage.
On a $300,000 mortgage, moving from 6.5% to 7% adds about $100 a month in principal and interest, or nearly $36,000, over 30 years, Bernstein says. Compared with the roughly 5.9% rates seen briefly in February, the same borrower would pay about $215 more per month.
Higher rates also can affect how much a buyer can qualify for. Bernstein offers this example: A borrower earning $100,00 a year with no monthly debt, 20% down and a 50% debt-to-income limit could qualify for about a $670,000 home at 6.5%. At 7%, that falls to about $640,000—about $30,000 less purchasing power. That means the same income may buy less house at a higher mortgage rate.
Economists are keeping watch on mortgage applications for home purchases, a weekly measure of buyer demand. Purchase applications fell 1% last week as rates surpassed 7% and were 19% lower than the same week a year ago, the Mortgage Bankers Association reports.
Still, higher rates don’t affect every buyer in the same way.
“The flip side is that higher rates can cool buyer demand and create more negotiating leverage, depending on the local market,” Bernstein says. “Buyers may have more room to negotiate the purchase price, ask for seller credits toward closing costs, or use those credits to fund a temporary buydown that reduces the payment during the first few years of the loan. In markets with limited inventory and strong demand, that leverage may be smaller, but in softer markets it can offset some of the added borrowing costs.”
Some new-home builders also are using incentives to help offset higher borrowing costs, including mortgage rate buydowns in the 5% range in some cases. The latest National Association of Home Builders/Wells Fargo Housing Market Index survey found that 66% of builders reported using some form of sales incentives this month. More than a third of builders also cut home prices in September, with an average reduction of 6%.
Further, studies show that shopping around for a mortgage by gathering quotes from several lenders can make a difference. Rates can vary widely among lenders, making it worthwhile to compare multiple loan offers rather than accepting the first one. A newly released LendingTree analysis found that borrowers who secured the lowest mortgage rates between January and June had an average APR of 5.52% compared with 6.15% for other borrowers—a 0.63 percentage point difference. On a $300,000 mortgage, that translates to about $121 in monthly savings.
The analysis looked at how some borrowers were able to secure a lower rate. “The lowest rates typically aren’t the result of one financial magic trick,” says Matt Schulz, LendingTree’s chief consumer finance analyst. “These borrowers tend to arrive with stronger credit, bigger down payments and more options.”
Those receiving the lowest rates, for example, had a mean credit score of 755, compared with 727 for other borrowers, and 97% received at least three lender offers, compared with 89% of other borrowers. “The best mortgage rates generally go to borrowers who give lenders the fewest reasons to worry,” Schulz says.
Related: 6 Ways Your Buyer Can Save on Their Mortgage
So how long will mortgage rates remain elevated? Yun says mortgage rates could eventually come down if inflation eases, oil prices retreat and other economic pressures lessen. But for now, he expects rates around 7% to become more typical.
As for buyers hesitant about the recent uptick in rates, Bernstein offers another perspective: “The rate you close with today does not necessarily have to be the rate you keep for the life of the loan. Over the last few years, we’ve seen mortgage rates make short-lived but meaningful pullbacks when market conditions allow, creating refinance opportunities for homeowners who are prepared to act. Buyers still need to be comfortable with the payment they are taking on today, but they should also understand that periods of rate volatility can create opportunities both when they purchase and later when they refinance.”
