Interest Rates
By James Vaughn
Interest rates are all abuzz in real estate these days, but few truly understand how interest rates are derived, and how they affect your bottom line as a homeowner. Knowing how your interest rate works will aid you in planning your next home sale or purchase.
Buyers think about the interest they will pay on their home loan because it affects the amount they will pay on their mortgage each month, the total amount paid in interest over the life of the loan, and the amount of loan they can qualify for based on current income. Factors that affect a buyer’s interest rate include credit score, debt-to-income ratio (DTI), number of points paid to buy down the loan, and of course the market and individual lenders’ profit markup. Generally, the better the credit score and DTI, and the more points paid to the lender, the better the terms will be for the buyer’s interest rate.
While buyers are concerned about interest rates as they affect the affordability of the mortgage they are pursuing and the amount of home they can afford, potential home sellers should also pay attention to mortgage rates and the factors that underpin them in order to gauge the right time to sell. Contrary to popular belief, mortgage rates are not based on treasury notes, but rather on mortgage-backed securities in the bond market. These two rates can move in opposite directions, explaining the phenomenon we are currently seeing at the end of 2022 where headlines highlighting Fed hikes of interest rates can correspond to declining mortgage rates for many borrowers.
Given currently elevated interest rates relative to the past few years, what is a purchaser to do? Buy now, or wait to buy? There is opportunity and risk either way. While rates are certainly elevated compared to a year ago, it is also true that mortgage rates sitting at around 3% represented a historical anomaly, rather than the norm, and the current rate sits somewhere closer to the norm of the last few decades. Rates may not dip back to the 3% territory again for a long time. However, they may do so quickly as well. For the buyer trying to decide whether to buy now or wait, interest rates matter, but they are not the only factor. If you buy now and rates continue to go up, you may temporarily lose some equity in your property until the market comes back up, but you will have also secured the better rate. However, if rates fall, then refinancing represents a potential option to obtain a better rate in an appreciating market.
For buyers, it is important to pay attention to market activity surrounding mortgage securities in the bond market. When rates are rising, you should expect a decline in market prices, as we have seen over the past few months. Likewise, when they drop, the effect can lead to appreciation in home prices.
In both cases, interest rates only represent one factor at play, albeit an important one. Whether you are a home buyer, seller, or simply considering your next move, The Sands & Associates team is always ready to help determine the best time to buy or sell and navigate a complex transaction.