Mortgage rates here in Falls Church and across the country have been on the rise for a while. This has caused some potential sellers to put their plans on hold–no one likes jumping from a 3 percent loan to one in the mid-5s.
Is that the right strategy? What’s going on with rates anyway, and are there any workarounds for buyers? Let’s break it down, and we’ll give you our take.
RATES ARE UP, BUT STILL HISTORICALLY LOW
As of June 7, 2023, the average 30-year fixed mortgage rate in Falls Church is 5.5 percent, up from 4.5 percent a year ago. The average 15-year fixed mortgage rate is 4.8 percent, up from 4 percent a year ago.
John and I have been selling homes and helping buyers in the area for 15 years and have seen rates fluctuate a lot in that time. When we first got into the real estate business, 30-year mortgages were in the mid-7s, and if you can believe it, no one thought that was high! Rates then went on to exceed 8 percent. After that, they went on steady decent down to the 6s (which we all thought was great), and then just kept falling in 2021, the national average 30-year fixed bottomed out at 2.96 percent – unheard of! That isn’t the norm; it’s the exception. Never in my or John’s life or career have we ever seen that, and I doubt we’ll see it again.
Although rates are up, they are still relatively low compared to historic trends. The average 30-year fixed mortgage rate has been above 5 percent for most of the past 40 years.
As far back as March of last year, the Federal Reserve (or “Fed”) began taking actions to increase interest rates in an effort to combat inflation. Last year, inflation hit a 40-year high, and the Fed has been trying to bring it down to its target of 2%. It’s been working; over the last twelve months, inflation has been decreasing.
The Fed raises rates in a few ways; one is by setting the Discount Rate. This is an interest rate they charge banks for loans, which causes all rates downstream to be affected. The Fed is expected to continue raising interest rates throughout 2023 but the pace of rate hikes is expected to slow down as inflation continues to improve.
WHERE RATES ARE HEADED
Analysts are forecasting that mortgage rates will continue to rise in 2023. The Mortgage Bankers Association believes the average 30-year fixed mortgage rate may reach 6% by the end of the year. This is the main reason I think delaying a move can backfire; it’s better to lock in a loan at 5.5 percent versus 6.
The rise in mortgage rates is expected to continue constraining both supply and demand in the housing market, but home prices should remain strong in 2023. Even though demand for housing is lower today, it still outweighs the number of homes for sale.
WAYS TO REDUCE MORTGAGE COSTS
There are a number of ways to reduce your mortgage costs while interest rates are higher. Here are the best ones:
- Infuse more cash. A larger down payment will lower your loan balance and thereby your payment; along these lines, you can pay additional cash toward principal as you’re able. Although your mortgage payment is fixed, the interest portion fluctuates each month based on your balance. Paying down principal reduces this cost, which means a larger portion of each payment will further reduce your loan balance and overall cost.
- Shorten your term. A shorter-term mortgage will result in a higher monthly payment, but the interest rate will be lower, and you will pay off your loan much sooner. If you can afford a higher payment, this method will save you a lot of money on interest.
- Rate Buydown Credits. A rate buydown credit is a fee a borrower can pay to reduce their mortgage rate for a period of years. Sometimes, you can negotiate with the seller of your new home for a portion of this cost. Although you can buy one credit for the life of your loan, we’d recommend a 1- to 3-year credit for a 1 or 2 percent reduction in interest. By the time the credit expires, you may be able to refinance for a lower fixed market rate.
Mortgage rates are indeed higher than they were last year. This has affected buyers’ purchasing power and caused many people to hold off on buying and selling. Rates are still relatively low compared to historic trends, but we’ve been accustomed to even lower rates for a long time.
Although I understand why some sellers are hesitant right now, rates could very well be higher down the road. For this reason, I encourage anyone considering a move not to hesitate, and to take advantage of the cost-reduction strategies listed above.
By: Kris Walker