Mortgage Rates Are Rising. Should Prospective Buyers Be Worried?
by Maurie Backman | Jan. 22, 2021
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.
Image source: Getty Images
Though mortgage rates are still low, they've been climbing since the start of the year. Here's what buyers need to know.
On Jan. 1, the average interest rate for a 30-year mortgage was 2.765%. On Jan. 14, the interest rate jumped to 2.856%. While the latter is still a competitive rate in the grand scheme of things, it's hard to overlook the fact that mortgage rates have been climbing since 2021 began. The same holds true for refinance rates, which are generally a bit higher than the rates for purchase mortgages.
All of this begs the question: Should you rush to buy a home in case rates keep climbing? Or are you safe to wait things out?
Don't sweat rate fluctuations
First, let's get one thing out of the way. Mortgage rates can change on a daily basis, so it's not uncommon to see them creep upward for a period of time before dropping back down. But if you're worried about rates rising dramatically in the course of the year, that's unlikely to happen.
Right now, the economy is in a really bad place, and until things improve significantly in that regard, mortgage rates will probably remain relatively low. That doesn't mean they won't climb a bit more or even start to hover around the 3% mark. But will we see 4% mortgage rates this year? That's very doubtful.
Get $150 off closing costs with Better.com Mortgage
This is one of the top lenders we've used personally to secure big savings. No commissions, no origination fee, low rates. Get a loan estimate instantly and $150 off closing costs.
Another thing to keep in mind is that the difference between a 2.765% mortgage rate and a 2.856% rate isn't so substantial. If you're taking out a 30-year, $200,000 mortgage to buy a home, a rate of 2.765% will give you a monthly payment of $817.54 for principal and interest on your loan, and your total interest will amount to $94,315.61 over the life of your loan. With a 30-year, $200,000 mortgage at 2.856%, you're looking at a monthly principal and interest payment of $827.76, and total interest of $97,990.90.
Clearly, over the course of 30 years, that rate will indeed cost you more in interest. But on a monthly basis, you're talking about paying around $10 extra for your home. Of course, this is just one example comparing two specific rates, and the higher rates climb, the more you'll pay. And also, this doesn't mean you shouldn't try to snag the lowest mortgage rate you can. But you shouldn't let fear of rising rates drive your decision to buy a home sooner this year rather than later. If you're unable to find a home that meets all of your essential needs, it could pay to wait and see if inventory opens up later this year -- even if it means locking in a slightly higher mortgage rate.
Similarly, you may find that waiting to apply for a home loan results in a better rate for you. Say your credit score is good but not great. If you can increase your 700 credit score to 760, you might qualify for a much lower rate. But your score won't jump overnight, so if you need six months to improve it, that's worth doing.
Shop around
No matter when you decide to apply for a mortgage and what rates are averaging at that time, it's always a good idea to shop around for offers with multiple lenders. Doing so will increase your chances of landing a great deal.
Remember, too, that when you look at average mortgage rates, you're seeing a snapshot of how rates are trending on a national level. Based on your location and credit score, you may be eligible for a more favorable rate than the average, so don't get too caught up in those numbers. Instead, apply and see what offers you actually qualify for.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See our full advertiser disclosure here.
About the Author
Maurie Backman is a personal finance writer who covers everything from savings to retirement to healthcare. Her articles have appeared broadly on major outlets such as CNBC, MSN, and Yahoo.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
