- The average 30-year mortgage rate recently topped 5%.
- Though shorter-term loans are offering lower rates right now, that could change.
Rates have been climbing. What should borrowers expect?
There's a reason so many buyers rushed to purchase homes from mid-2020 through late 2021. During that time, mortgage rates plunged to extremely attractive levels.
In fact, there was a point in time when it was possible to sign a 30-year mortgage at under 3%. These days, however, borrowing is far more expensive. Recently, the average 30-year mortgage rate topped 5% -- a level not seen in many years. And rates for 15- and 20-year loans are also rising.
The question is: Will rates soar high above the 5% mark? And what should buyers do in light of that?
A tough combination of higher rates and home prices
Mortgage rates have been rising sharply since the start of the year. And there's no indication they're about to decline anytime soon.
This doesn't mean rates won't fall a bit from one day to the next. Rather, it's fair to assume that the days of taking out a 30-year mortgage at under 4% are behind us for a while. And it wouldn't be unreasonable to expect the average 30-year mortgage rate to creep toward 5.5% or even 6% this year.
Meanwhile, the average 15-year loan recently reached 4%. While an average 5% rate for this loan product would be a stretch this year, it's not out of the question. What’s more, the average 20-year loan is already hovering around 4.7%. So there's a good chance it will reach the 5% mark or beyond this year.
Of course, higher borrowing rates are problematic for buyers in their own right. Making things worse, however, is the fact that home prices are extremely high right now.
Granted, that's been the case since the second half of 2020. But back then, and for all of 2021, mortgage rates were low enough to help offset higher home prices. Now, buyers are facing the tough combination of higher borrowing costs and elevated home prices.
Should home buyers back out?
The average home buyer can't afford to pay cash for a home. And frankly, that's a risky prospect anyway, as it ties up a lot of money in an asset that isn't particularly liquid. As such, buyers generally have to take out a mortgage to purchase a home, and these days, that means signing up to pay a lot of interest.
Those who were already struggling to purchase a home when mortgage rates were lower should consider pulling out of the market until things cool off. One positive thing that might happen as a result of higher mortgage rates is that buyer demand might wane. That could drive home prices downward this year.
How to save on your mortgage
If you're thinking of moving forward with a home purchase this year despite rising mortgage rates, there are steps you can take to eke out some savings. First, consider a shorter-term loan over a longer-term one if you can swing the higher monthly payment that comes with it. Secondly, work on boosting your credit score. The higher that number, the more competitive an interest rate on a mortgage you'll likely get.
Finally, shop around with different mortgage lenders before committing to a home loan. Although rates are up across the board, you might manage to snag a better deal with one lender over another, so it pays to put in those applications and see what offers you get.
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