Could Higher Mortgage Rates Be a Good Thing for Home Buyers?

Higher rates may not be what buyers want, but there could be a silver lining.

Many buyers spent much of 2021 bemoaning the fact that home prices had gotten prohibitively expensive. The good news, though, was that mortgage rates sat at competitive levels throughout 2021, which helped offset the blow of higher home prices.

Right now, mortgage rates are still fairly attractive from a historical perspective. But they're not nearly as low as they were last year. In fact, as of this writing, the average 30-year mortgage rate is close to 4%. And rates were higher during the first two months of 2022 than they were at any point in 2021.

Of course, the more interest buyers are charged on a mortgage, the more expensive it becomes to finance the purchase of a home. But higher mortgage rates aren't necessarily a bad thing, because they could lead to one much-wanted trend.

Will higher rates push home buyers away?

A big reason why home values managed to soar so much in the course of 2021 was that buyer demand remained strong at a time when inventory was notably low. Right now, inventory is still low, and buyer demand is still pretty high. But if mortgage rates continue to rise or stay at their current levels, buyer demand could start to cool off. And that could, in turn, lead to a drop in home prices.

Plus, if buyer demand wanes in the wake of higher mortgage rates, today's home buyers may be less likely to wind up landing in bidding wars. Those are a very stressful thing to grapple with, so seeing a decline in this year's housing market could be a good thing.

How to secure a lower rate on your mortgage

If you're eager to buy a home but are worried about the fact that mortgage rates have risen this year, there are steps you can take to secure more affordable financing. First, work on boosting your credit score if it's not as high as you'd like it to be. Getting that number into the upper 700s could make you eligible for the lowest interest rate any local mortgage lender has available.

At the same time, aim to pay off some debt so you can lower your debt-to-income ratio. That's another big factor lenders take into account when giving out mortgages.

Finally, be diligent about shopping around. Lenders can set mortgage rates at their own discretion, so gathering a few different offers could make it easier to pinpoint the best deal.

While an uptick in mortgage rates could result in reduced buyer demand and lower home prices, at the end of the day, today's buyers still don't want to spend more than necessary on a mortgage. We don't know exactly how rates will trend for the rest of the year and to what extent, if any, they'll continue to climb. But if you raise your credit score, pay down some existing debt, and do a good job of comparing offers, you'll put yourself in a better position to reap as much savings on a home loan as you can.