Editor’s note: updated June 29, 2017
Mortgage rates are a complicated subject that can affect your ability to buy and sell homes in ways you might not expect. This post will take a look at how rate fluctuations impact your buying power as well as how they impact your ability to sell a property. We’ll also cover how to predict rate changes, what causes interest rates to rise and fall and how these changes can impact your bottom line.
A Few Interest Rate Basics:
Mortgage rate increases and decreases are calculated in eighths – so you’ll always see intervals like these:
- increase from 5% to 5.125%
- decrease from 5.75% to 5.635%.
While that small of a change may seem inconsequential, it can actually mean spending several thousand more (or less) dollars over the years as you pay off your loan. Check out thesemortgage payment charts to get a better idea of how changes can impact your long-term finances.
However, advertised rates often don’t fall into the eighths pattern because lenders pad the rate percentage with whatever amount they’re tacking on to cover loan funding fees. That’s why you often see numbers like 4.99% in bank and lender ads. Banks and lenders also often advertise average rates or rate ranges, so rate numbers can be misleading until you get deeper into the loan approval process.
How to Predict Mortgage Interest Rate Changes – Evaluate 10-Year Treasury Bonds:
As you can imagine, trying to come up with a decision on how to set a fixed thirty-year interest rate is no easy task because it’s all but impossible to guess what’s going to happen to the economy in five years, much less thirty. However, data shows that the average home buyer refinances their mortgage about ten years into their payoff. That’s why, as explained by All About Mortgages, you can look to indicators from 10-year Treasury bonds to see what you can expect to happen with interest rates. If the 10-year bond rates (aka bond yield) is going up, it’s likely that mortgage rates will as well, and vice versa.
Why is this a good way to get a general feel for what’s coming? Because investors turn to bonds as a safe purchase option when the economy is struggling. Therefore, when bond purchases increase, their yield falls. Since the economy also has a major impact on all things money, watching how bond yields are reacting can give you a good idea of where mortgage rates are heading. However, this is not the only factor to consider. The overall health of the economy, supply and demand, inflation rates, unemployment rates, the health of the real estate market and a myriad of other factors also influence rate changes.
Changes in Home Sales
If people think that the Fed’s minor increase in rates will make mortgage interest rates skyrocket, they may be more likely to buy homes now, while they still can. This is true for refinances as well, but is especially notable for home sales. With rates recently rising for the second time this year, buyers are motivated to move fast before the third anticipated rate hike hits. Why?
People have a sense of scarcity, and they worry that they will be forced out of the market. Experienced investors are less likely to be swayed by such a Chicken Little approach to real estate, but they can still feel the effects. For example, if there is a huge flood of mortgage applications and home purchases when you buy a home, you might encounter a slower market when you go to sell it.
Interest Rates in Practice
Even with a change of 0.2%, you’ll notice a change in what you have to pay. Though a few dollars difference every month seems like small potatoes, it can mean paying thousands of extra dollars over the life of your loan. That’s why, as an investor, it can make a lot of sense to get creative with your financing. Doing so can dramatically increase your buying power, increase your total assets, and decrease the amount of money you’re throwing away on interest.
Mortgage interest rates are variable, but thankfully they tend to change relatively slowly. Use this information to help make educated decisions on the best time to buy and sell your assets.