For the past five decades, mortgage interest rates have fluctuated from historic lows (3.40% as of 3/20/2021, which is not even its lowest level) to what seems like a near impossibility in the rearview mirror – a high of about 18+% in the early 1980s. If you do the math for the curious-minded, the 30-year average for fixed-rate mortgages calculates to approximately 7.75% (FHLMC Rates).
With rates at or near historic lows, scores of buyers (and smart, current homeowners seeking a lower rate) have seized the moment by taking advantage of these extraordinarily low mortgage rates, which, incidentally is one of the amplifying forces of the housing market’s strong demand and rising home prices.
However, market watchers have recently noticed that mortgage rates have begun to rise.
So why are rates rising now?
There are many economic factors that impact mortgage rates. A few examples include revisions to the Federal Reserve’s policymaking, economic factors (i.e., inflation), and many other non-financial factors, like pandemics or cataclysmic weather events.
However, for over half a century, a significant metric relationship has been shown to exist between mortgage interest rates and the current yield on the financial instrument known as the 10-Year Treasury bond. Given that mortgage interest rates hit rock bottom in 2020, logic would predict that the 10-Year T-Bond would have also hit a historic low in 2020 – which, in fact, it did.
The rise in the yields of U.S. T-bills/bonds (and therefore mortgage rates) is the overall market’s reaction (i.e., consumer sentiment, etc.) to economic news (like inflationary data), elections, and other world events. In this instance, market players have driven the T-Bill yields upwards due to the efforts of scientists across the globe working to control (or eradicate) COVID-19.
Economists prefer to avoid rate predictions as rates rarely behave in predictable ways; however, Freddie Mac’s Chief Economist believes the market fundamentals support interest rates in the 3% range.
What does this mean for homebuyers?
A higher interest rate will either mean –
- The amount of the loan you qualify for may be revised downward if mortgage rates increase.
- The required monthly principal and interest payment (P and I) will be higher, but the difference will be contingent on the loan amount and the exact rise in rates.
The following table helps illustrate the change in monthly payments for a one-half percent increase on a $400,000 loan –
When one considers the interdependent relationship that exists between treasury yields and mortgage rates, it is likely rates will rise. In other words, for those who have been waiting for the right moment, this may be it.
Mortgage rates may never reach these ridiculously low levels again anytime soon, if ever.