What Rising Mortgage Rates Mean for Home Buyers

Couple signing contract

For homeowners, much of 2020 and 2021 were spent refinancing their current mortgage rates and enjoying lower monthly mortgage payments. And, who could blame them with federal funds rates as low as 0.25% when the pandemic began, pushing mortgage rates to historic lows?

Even into December of 2020, mortgage rates were still below 3%, and homeowners continued to take advantage of the opportunity to refinance.

One year later, although mortgage rates are still well below the nearly 6% rates in effect in 2019, we’re starting to see the 30-year fixed-rate mortgage rise. According to a recent article from REALTOR Magazine, the rise is prompting lenders to shift their focus back to home buyers as refinancing begins to slow down.

The article also states that nearly half of the loans packaged into government-backed securities and sold to investors in the third quarter were purchase loans, and applications to finance a home loan fell by 7% during the final weeks of October — 22% lower than the same time last year when refinancing was still in high demand.

Higher mortgage rates may sound less appealing to home buyers, but the reality is that the home purchase market is picking up speed despite the 30-year fixed-rate mortgage rising above 3%.

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In fact, third quarter in the home purchase market generated $28 billion more than the first half of the year, which is an 11% increase from the year prior.

Why the appeal?

With lenders losing steam with refinancing opportunities, buyers now have the upper hand to negotiate lower interest rates to offset some of the increase in cost. Although buyers who shop around for the right mortgage rate tend to save money on their mortgage anyway, the lull in refinancing puts them in an extra advantageous position.

On top of more power to negotiate, prospective buyers are aware that mortgage rates will likely continue to rise, making now a better time than later to jump on the still relatively low rates available.

For real estate agents, this is the perfect time to encourage prospective home buyers to “get off the fence” and take advantage of rates before they creep back up to pre-pandemic numbers, especially now that more inventory is opening up in some parts of the country — especially for buyers looking for smaller, single-family homes or attached homes.

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