Over the past couple of months, the news has been filled with headlines about inflation and increasing mortgage rates. Although mortgage rates took a dip to historic lows during the coronavirus pandemic the numbers have since begun rising because of a variety of reasons. If you’re looking to find the next home of your dreams but aren’t sure what this means for your move, read on to get the knowledge you need.
How are mortgage rates set?
Mortgage rates are determined by the “markets” as a whole, meaning stocks, consumer goods prices, and the costs of commodities all play a significant role in determining interest rates. Generally speaking, when consumer spending overall is low, the government lowers interest rates to drive consumer spending.
In particular, the Central Bank of the United States — also known as the Federal Reserve — constantly analyzes market trends and lowers rates to prevent recessions, and they’ll increase interest rates to reduce spending. The Federal Reserve has recently begun doing the latter to combat historically high rates of inflation.
On a related note, if you’re looking to purchase a home, you need to know about prime rates and the bond market. The prime rate is the interest rate that banks and lenders offer to highly qualified (prime) customers. This is generally the bare minimum they’ll charge on their loan. For consumers who don’t fall in the prime bracket, then they’ll have to pay a higher interest rate.
Just as the Federal Reserve adjusts rates to account for changes in the economy, banks also adjust their prime rate to balance consumer spending against inflation. Compared to other areas of the economy, the housing market showed massive signs of inflation because of low borrowing costs and a shortage of inventory. Because home prices were so skewed due to the pandemic, it makes sense that there are now major price swings.
What do rising rates mean for you?
Although rising mortgage rates may be intimidating when purchasing a home, the good news is that they aren’t the end of the world. Rather than trying to time your home purchase to when rates are at ideal levels, you should purchase a home when it makes sense for you. When you purchase a home, you’re locking in the price, which means you’ll capitalize on any price appreciation down the road, and you also can refinance when interest rates decline.
While this all may seem intimidating, remember, you don’t need to handle the homebuying process alone. If you work with a top real estate agent to purchase your next home, you’ll have someone with industry expertise to help you identify the most promising properties and then represent your interests at the bargaining table. The great thing about working with a real estate agent as you purchase a home is that your agent is paid as part of the seller’s agent’s commission.
Overall, while the current economic situation may be turbulent, remember that the world is constantly evolving and that in the absence of being able to predict the future, the best thing you can do when purchasing a home is to buy when it makes sense for you.