Rising Mortgage Rates: Expert Advice For Common Concerns About Rising Mortgage Rates

Advice for Common Concerns about Rising Mortgage RatesAlthough news of rising mortgage rates is causing concern for some homebuyers, most real estate and financial experts will agree that these increases are not a cause for alarm. Instead, increasing rates are an opportunity for prospective homebuyers to assess their long-term goals, be realistic about their financial plan, and identify long-term strategies that support them.

A home is the biggest purchase most people ever make, and paying it off can take decades. While current rates seem alarming today, they're less intimidating when considered within the context of a long-term plan that includes thorough preparation, careful budgeting, and occasional on-the-fly flexibility.

If you have clear homebuying goals and have been on track for several years, don't let rising mortgage rates hold you back. When it comes to changes in the housing market, most experts have the same advice for buyers: don't panic.

In this blog post, you'll find mortgage rate opinions from in-the-know sources on real estate and the economy. Keep reading to find expert advice to soothe your concerns and help you make informed decisions amid increasing mortgage rates.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What Are Mortgage Rates And Why Are They Rising?

The rate hikes can happen for a variety of reasons. One reason is that the Federal Reserve raises and lowers interest rates to regulate the economy. When the economy is growing, average rates often grow with it.

Some people might say that the upward trajectory is a side effect of federal interest rates rising, but it's not quite that simple. To get the real answer, we need to define a few useful financial terms to help you understand the relationship between federal interest rates and mortgage interest rates.

Interest Rates: The Price Paid to Borrow Money

Interest rates are essentially the price of borrowing money. They're expressed as a percentage and determine how much interest will be paid on borrowed money over time. “Interest rates” is a broad term that's used interchangeably for several types of loans. 

Bond Rates: The Government's Interest Rates to Citizens

The U.S. government partially funds itself by selling bonds, which are essentially loans that citizens issue to the government. When citizens hold their bond for the agreed-upon term, they get their initial investment back plus interest (the amount of interest is determined by the bond rate). The Federal Reserve sets the price of bonds, and that price changes frequently.

Mortgage Rates: The Interest You Pay on a Home Loan

Mortgage rates are the interest you pay on your home loan. For example, a 30-year fixed mortgage rate is the additional price paid per month so that the lender can profit off letting you borrow money. Mortgages are loans usually issued by private banks, but some mortgages are government-backed. Mortgage interest rates are highly individual and are determined by personal data, including your credit score, loan-to-value ratio, the down payment you provide, and more.

One misconception is that the Treasury yield sets the mortgage rates. While this is partially accurate, it doesn't represent the entire truth.

The Relationship Between Bond Prices and Mortgage Rates

Generally speaking, housing economists have found an opposite relationship between bond prices and mortgage rates. When bond prices are high, mortgage rates are usually lower. When bond prices are low, mortgage rates are usually higher. Most mortgage lenders set their average mortgage interest rates just above the bond interest rates to attract similar investors.

Common Homebuyer Concerns Around Rising Mortgage Rates

Now that you understand the types of interest rates at play in this situation, we can start talking about some of the concerns people have about buying a home when interest rates are higher. It's normal to have concerns about rising interest rates, but it's important not to make rash decisions about home buying. Always consult an expert before deciding to buy or not buy a home.

Common Concerns about Rising Mortgage Rates

Concern: Rising Mortgage Rates Mean I Should Wait to Buy a Home

When mortgage rates go up, many prospective buyers get scared because they think it means that they shouldn't buy a home. In reality, this isn't always the case. Sure, there's some sound logic behind this fear. Why would anyone want to pay higher monthly payments on their home? There's a lot of debate surrounding the importance of home prices and interest rates. However, one thing is clear: higher rates don't inherently increase home prices. There are a few ways to compensate for increased interest rates for first-time homebuyers.

Expert Advice: Waiting Doesn't Lower The Interest Rates

Most mortgage experts agree if you're financially on track to buy a home, don't let a bump in mortgage rates derail you.

"Trying to time the mortgage market is like trying to time the stock market - it's a strategy that loses most times,” says Dan Green, the CEO of homebuyer.com. "If you're ready to buy a home, buy a home."

If You're Ready to Buy a Home, The Time Is Always Right

What does it mean to be ready to buy a home? 

Being ready to buy a home means you've saved a down payment, established a budget, and assessed your long-term housing needs. If you've been sticking to a home buying plan and saving diligently for a down payment, you don't have to be deterred by rising rates. Waiting to buy could mean you miss your chance to get the lowest rate possible. If the average 30-year fixed mortgage rate goes up much higher over several years, you'll be happy to have secured a lower rate. In short, today's highest rates could be tomorrow's lowest.

"If you see the mortgage rates increasing, it is best to act as soon as you get a chance," says Christopher Sioco of Parachor Consulting. "If the rates are rising, they will cost you more if you buy tomorrow."

While rates ranging from 3.5% to 4% seem high compared to where they were at pre-pandemic levels, they still aren't as high when viewed from a historical perspective. 

"Prospective home buyers should not wait based on rates because rates are still at a very low point in a historical timeframe," says Michael Kaufman of Gadura Mortgage.

For example, in 1981, the average mortgage rate was above 16%.

Be Proactive, Not Reactive: Explore All Types of Loans

Instead of waiting, mortgage experts advise people to be flexible with their financing options and explore all of the mortgage types available. Remaining flexible can also keep you on track with your plans when interest rates are on the rise. Instead of settling for the standard 30-year loan, you should see what else is out there. 

A 5/1 adjustable-rate mortgage (ARM) is one of the best ways to stay flexible as interest rates increase. An adjustable-rate mortgage is a type of mortgage that has an interest rate that changes or fluctuates. A hybrid ARM is a special subcategory of loans with lower interest than the average 30-year fixed mortgage rate for the first five years. If interest rates drop, you can refinance your home.

Refinancing is when owners swap their mortgages for 15-year loans and 20- or 30-year loans when refinance rates are optimal. This means you could benefit from the lower initial rates of a hybrid ARM while interest is higher, then refinance when there's a drop in rates. Use resources like Freddie Mac or Fannie Mae to track rates and estimate your expenses with a mortgage calculator

Concern: Higher Interest Rates Make It More Expensive to Buy a Home

At times like these, most people are wondering, "will increasing mortgage rates impact home prices?" It depends on your personal situation. Housing prices don't increase or decrease with loan regulations. Higher interest rates do mean you'll probably be making higher monthly mortgage payments, but to say it's more expensive depends on the type of loan product you get. Real estate markets are fickle, and successful investments are all about the long game. When it comes to buying a home, your total expenses are just as important as your monthly expenses.

Expert Advice: Think About Long-Term Finances

Big-picture thinking is one of the most valuable tools a homebuyer can have when making financial decisions. Property is one of the few purchases that experience price appreciation. It's important not to let short-term obstacles distract you from the long-term goal. 

Mortgage Rates Go Up, Housing Prices Go Down

Yes, rising rates make your monthly mortgage payments more expensive. But monthly expenses are just one piece of the puzzle. Experts have found that rising mortgage rates in the short term can reduce some homebuying costs in the long term.

Higher mortgage rates can drive down competition for housing. Especially in areas with limited supply, lower demand can cause a correction in prices.

"Higher rates could be a blessing to buyers in some regions by keeping prices in control and reducing competition in this paradigm-shifting industry," says Corey Tyner, CEO of BuyYoDirt.com. "Suppose buyers aren't spending as much on their homes and aren't engaging in insane bidding wars. In that case, home buying could become less expensive—a welcome lifeline for many first-time buyers who have been previously locked out of homeownership due to record-high costs."

Reassess Your Financial Plan to Boost House-Buying Power

Furthermore, if your financial decisions for homebuying are based entirely on low mortgage rates, you might not be setting yourself up for success.

When interest rates rise, it's an excellent opportunity to revisit your homebuying budget. Were you maxing out your budget on monthly payments that seemed cheap because of low-interest rates? If buying a home is a top priority for you, you should still do so when interest rates increase. Simply find a property that suits your needs but maybe doesn't have all the bells and whistles. By opting for the lowest house prices you can find, you decrease your overhead and increase your chances of getting a high return on investment when you sell. Long-term financial planning is the key to real estate success.

Lower Other Expenses By Increasing Credit, Income & Down Payment Funds

Periods of rising mortgage rates also offer a chance to make yourself a more favorable candidate for low monthly payments.

"[Larger monthly payments] can provide opportunities to lower these interest rates by improving credit, income, or even providing larger down payments," says Omer Reiner, the President of Florida Cash Home Buyers.

Waiting out rising mortgage rates isn't advisable if you already have a detailed financial plan. If you don't have one, consider the recent mortgage rate increases as a sign to start making a long-term financial plan leveraging the effects of credit on home buying

Concern: Rising Mortgage Rates Are a Bad Sign For the Economy

You've probably heard the term "bad economy" thrown around many times in news about mortgage rates. But what is a "bad economy," really? The U.S. economy is endlessly complex. The indicators we use to discuss its health are only partial views of something much larger. Referring to the economy as "good" or "bad" is nearly impossible to do accurately. Economists have found that the financial system moves in cycles. Each cycle of the economy has pros and cons. Here's what they have to say about the relationship between increasing mortgage rates and the economy at large.

Expert Advice: Rising Mortgage Rates Are Neither "Good" Nor "Bad"

The relationship between mortgage rates and the economy isn't precise. Mortgages rates are partially determined by federal interest rates, but that relationship doesn't necessarily clarify anything about the economy as a whole. Some experts will tell you that rising mortgage rates don't have any economic effects. 

"There is no relationship between mortgage rates and the economy," says Dan Green. "Mortgage rates reflect Wall Street's 30-year market risk outlook. The next six months of the economy barely register."

Others might argue that the link between federal interest rates and mortgage rates does tell us a lot about the state of the economy.

The Federal Reserve lowers interest rates to help the economy grow when it is not doing well. This means that borrowing costs become cheaper. Therefore, high interest rates might not always have a negative impact, and low interest rates might not always be favorable.

"Mortgage rate increases can be a sign of a strong economy. It can show that there is a high demand for homes and income levels and GDP are in a strong position," says Rebecca Awram, a mortgage advisor at Seniors Lending Centre. "On the inverse side, if rates go way down, it can show that the economy is slightly struggling, since the demand for homes is slowing and income levels could be on a downward trend as well.”

In short, some experts believe that mortgage rates are not a good indicator of a good or bad economy. Some believe that rising interest rates provide some insight into economic health. Regardless, mortgage rate fluctuations are a byproduct of the economy's natural cycles, and there are pros and cons to economic cycles that cause mortgage rates to increase.

What Should I Do About Rising Mortgage Rates? Actionable Items For Buyers

This article has covered a lot of in-depth information about mortgage rates. Don't feel pressured to retain everything at once. You can always revisit the topic as the situation develops. If you're planning to buy a home, here are a few things you can do about rising mortgage rates.

  • Don't panic
  • Establish a more detailed financial plan
  • Reassess your long-term goals
  • Be flexible about your financing options
  • Focus on what's in your control as the economy runs its natural course

Use Expert Advice to Create a Homebuying Plan

The current mortgage rate climate can be unsettling for prospective homeowners, but it's important to remember that interest rates are a drop in the real estate bucket. Even when mortgage rates stabilize, homebuyers should consult with experts and stay flexible to find the best deal possible. It's also crucial to make a financial plan and stick to it. By following these tips, you can make sound decisions about one of the most significant investments of your life.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

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