Mortgage rates are up. Does it still make sense to apply for a loan?
It's no secret that mortgage rates are high right now — especially compared to what they were a few years ago. Depending on whether you opt for a 15-year or 30-year mortgage, rates are averaging around 6.5% to 7% — and recently ticked up slightly to a month-long high. And, those types of rates can be a hindrance if you want to buy a new home.
After all, even a slight increase in your mortgage rate can cost you thousands of dollars in interest over the life of the loan. So, with mortgage rates where they're at currently, does it make sense to apply for a loan — or should you wait for rates to fall?
Don't wait to buy your dream home. Lock in your mortgage rate now.
Mortgage rates are up. Does it still make sense to apply for a loan?
Back in 2020 and 2021, it was possible to get a mortgage loan rate close to 3% — but today's rates are more than double that. It's important to remember, though, that those rates were due in large part to the COVID-19 pandemic, and it's unlikely that mortgage rates will fall that low again anytime soon.
Not to mention, there are several other reasons you may want to secure a mortgage loan now, including:
Competition is increasing
When mortgage rates are high, it costs more to borrow money for a home, and in turn, some potential buyers are priced out of the market. As a result, you have less competition to contend with.
However, mortgage loan applications increased 3.7% last week when compared to the week prior. This suggests that more buyers are starting to flood the market. So, what does that mean for you?
As more buyers enter the market, there's a higher likelihood that homeowners will have more offers to choose from. Moreover, prices may increase as demand for new homes grows. So, you could miss the opportunity to get your dream home or be forced to pay more for it if you wait.
Get preapproved on a mortgage loan today.
You can refinance later
Homebuyers often look at mortgage rates as though they're set in stone, but that's not the case. If you keep the same mortgage through the life of the loan, and you have fixed interest, you can expect to pay the same rate until it's paid off, of course — but you can always refinance.
In other words, you can purchase your home now while competition and prices are relatively low — and then refinance your home in the future when rates fall and competition drives prices upward.
You could get a lower rate
There are a couple of ways you may be able to get a lower-than-average interest rate on your mortgage:
- Mortgage points: Mortgage points are fees paid to your mortgage company to lower your interest rate — typically by a percentage of a point. This could save you quite a bit of money over the long run, but it may not make sense if you plan on refinancing in the future. So, consider your future plans beforehand.
- Adjustable rate mortgages (ARMs): It could also be smart to consider an adjustable-rate mortgage, as the initial fixed rate tends to be lower, which could save you money on interest as you wait for mortgage rates to fall. Moreover, ARMs have variable interest rates that follow the fixed-rate period of the loan. So, if rates have declined during the variable rate period of your loan, you'll likely enjoy a lower interest rate on your mortgage loan as well.
It's unclear what the Federal Reserve might do next
There's a chance that mortgage rates may drop in the future, but nobody knows for sure what may happen. The Federal Reserve has suggested that lower rates may happen at some point in 2024, but inflation is still above the Fed's 2% target — and the inflation rate ticked back up unexpectedly in December 2023.
If the inflation rate continues to climb or stay stagnant, more Fed rate hikes could happen instead. And that, in turn, would have an impact on mortgage rates.
Lock in your mortgage rate today before any potential rate hikes.
The bottom line
Mortgage rates are higher than many homebuyers would hope for — especially when you compare them to the record-low rates that were available a couple of years ago. However, you shouldn't let that stop you from buying the house of your dreams. By securing a mortgage loan and buying a home now, you could avoid the increasing competition and higher home prices that could lie ahead.
