It’s important to be prepared for increased mortgage rates, whether you’re looking for a move-in-ready home or one that’s a bit of a fixer-upper.
Mortgage rates are on the rise. After hitting a 40-year low of 2.82% in November 2020, the average rate for a 30-year fixed mortgage hit 5.78% in late June.1 It’s the first time rates surpassed 5% since 2011.2
What’s causing the increase?
For one, the housing market turned red-hot during the pandemic, as more Americans took advantage of historically low rates to purchase their dream homes or buy more space to spread out. The increased demand strained the inventory of homes, leading home prices to rise by 18.8% in 2021.3 Anyone buying a home over the past 2 years may have found themselves in a bidding war, paying much more than asking price or waiving inspections and other pre-closing requirements.
Homes weren’t the only thing costing more; people were paying more for everything as inflation hit 40-year highs in early 2022. The Federal Reserve began hiking the federal funds rate in March, with plans for additional rate increases in their upcoming meetings to combat high inflation. A higher fed funds rate leads to higher interest rates on car loans, personal loans and of course, home loans.
The effect of rising mortgage rates
For buyers, higher mortgage rates mean less purchasing power. Say a buyer wants to stay at or under a monthly payment of $1,500 — they can afford to buy a bigger or more expensive home when rates are low than they can when rates jump.
Still, rising mortgage rates aren’t necessarily a bad thing. As rates increase, demand for homes will cool, leading to more options for buyers and stabilizing prices. Many sellers will also return to agreeing to a home inspection or contingent purchase — practices that protect buyers but were widely abandoned in the buying frenzy of the last 2 years.
It’s also good to keep a historical perspective when considering rising mortgage rates. While rates on a 30-year fixed mortgage have stayed under 5% over the last decade, many homebuyers paid significantly more interest in the last 40 years. If you bought a home in late 1981, you might have paid as much as 18.44% in interest!4
30-year fixed mortgage rates over the last 40 years
Date |
Rate |
May 1982 |
16.63% |
May 1992 |
8.60% |
May 2002 |
6.76% |
May 2012 |
3.75% |
May 2022 |
5.25%5 |
Getting the most home for your money
Fortunately, there are some things you can do to maximize your homebuying power as rates rise. Here are 3 steps to take:
1. Begin the process as early as possible
Starting the loan approval process early gives you advanced warning into any unforeseen credit or qualifying issues in today’s highly regulated environment. It is quite likely the mortgage landscape has changed since your last mortgage. Furthermore, if you happen to be a first-time homebuyer, starting as soon as possible will give you more time to familiarize yourself with the process.
2. Know your credit
Your credit score tells a lender what kind of borrower you’ll be and how you’ve managed credit in the past. Avoid surprises by requesting a free copy of your credit report from the 3 major credit reporting agencies:
3. Work with an experienced banking team
Developing a relationship with the right mortgage lender can make a big difference in the homebuying process. Choose a lender who is willing to dig in to your financial details and make a rate offer based on your specific situation.
Are you ready to find the place you can call home?
We offer a full range of loans to help get you in your dream home. To find the right loan for you, contact one of our mortgage specialists.
