Quarterly Mortgage Rates Forecast – Forbes Advisor


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Mortgage rates surged at a record-high pace this spring—flying from 3.76% in early March up to 5.81% by late June. And while rates have fallen slightly since then, some experts say it may continue to rise in the coming months.

Not only are mortgage rates rising, but home prices are going up, too. U.S. home prices shot up 18.7% from the first quarter of 2021 to the first quarter of 2022, according to the latest Federal Housing Finance Agency House (FHFA) Price Index. As inflation persists, mortgages and home prices will continue to get more costly.

Mortgage Rates Predictions For the Coming Months

Mortgage rates are the highest they have been in 10 years, and most third-quarter predictions are in the mid-5% range.

“Borrowers are finally catching a break now as rates have dipped measurably . . . though it is unclear whether that means we’ve passed the peak or are only getting a temporary reprieve, like in late February,” says Jeff Tucker, senior economist at Zillow.

Tucker expects rates to stay within the bounds of 5% to 6% this year.

Lawrence Yun, the chief economist at the National Association of Realtors (NAR), predicts that rates will bump around 5.3% to 5.7% in the summer.

“Most of the mortgage rate gains may have already occurred even as the Federal Reserve plans on many more short-term rate hikes,” Yun says. “Mortgage rates, in essence, already priced in the Fed’s expected moves.”

But Ali Wolf, chief economist for Zonda, a homebuilding property technology company, warns that rates could climb depending on what happens with incoming economic data.

“Inflationary pressures and the anticipation of Federal Reserve rate increases have been primary drivers of the mortgage rate climb,” Wolf says. “If inflation shows little signs of easing or the Federal Reserve somehow provides a policy shock, we could see interest rates jump.”

Higher Mortgage Rates Sting Buyers and Sellers

Mortgage rates are more than two percentage points higher in July than at the start of the year. The average 30-year, fixed rate mortgage was 5.3% in early July, up from 3.22% the first week in January, according to Freddie Mac. At the same time, inventory is falling well below demand, causing home prices to march upwards.

For example, the monthly payment on a $400,000 30-year mortgage with an average interest rate of 3.22%—during the first week of January 2022—would be about $1,734 per month (not including taxes, a down payment and other housing costs). Presently, the same house with today’s average rate of 5.3% would cost $2,221 per month—a $487 price increase.

“Rising mortgage rates are compounding affordability challenges that have been brought on by record home value growth,” Tucker says. “Many aspiring homebuyers will have to make more compromises to afford a home but will still forge ahead in spite of higher borrowing costs. For example, they’ll have to buy in a different neighborhood or city, or they’ll buy a townhouse instead of a single-family home.”

If rising rates push enough buyers out of the running, then that relaxed demand puts a big dent in price growth and competition. Similarly, as the cost of money rises, investors may also pull back, meaning even less competition for buyers.

“Sellers may have to consider price reductions if buyer interest dissipates,” says Steve Reich, chief operations officer at Finance of America Mortgage. “That may give homebuyers a window of opportunity to act. Remember that we’re headed into the busy summer home-selling season when home prices are typically at their highest and demand is still relatively strong in desirable areas.”

How Homebuyers Can Cope With Higher Mortgage Rates

Lenders consider several factors when deciding whether to approve a home loan application, including the borrowers’ income and debt as well as housing costs—which include the price of the home and interest rate.

As mortgage rates rise, monthly housing costs get more expensive, making it increasingly challenging for buyers to get approved for homes in the same price range they were looking for last year. Many people will have to either look in a more affordable area, come up with a larger down payment or search for homes in a lower price range to fit their budget.

Related: Mortgage Application Denied? Here’s What To Do

Another option is to get a 5-year adjustable-rate mortgage which often offers a lower interest rate than 30- or 15-year fixed mortgages. However, buyers should be aware that these 5/1 ARMs reset after five years, meaning if interest rates are up, the rate on your mortgage will get more expensive, too. Of course, the opposite is also true; if rates fall, your loan could get less expensive.

Many borrowers opt to refinance into a fixed-rate mortgage before their 5/1 ARM switches into its adjustable period.

“Some buyers on the margin have already been priced out of homeownership due to rising mortgage rates and the resulting impact on the monthly mortgage payment. Other shoppers will find that they may need to put more of their income towards housing than they originally planned,” Wolf says. “There are already some signs that more buyers are stretching to purchase a home in today’s market.”

Be Careful About Refinancing Today’s Higher-rate Environment

For most homeowners, refinancing their mortgage isn’t financially savvy, as rates have climbed over 5%. This means borrowers will have to find other ways to access equity through home equity lines of credit (HELOCs) or home equity loans (HELs).

Both HELOCs and HELs are typically less expensive than credit card interest rates, so these types of loans may be more cost-effective for people who want to consolidate their debt or need to access credit for a major purchase.

However, equity-based loans carry substantial risk because they use your home as collateral. Borrowers should make sure they can repay the loan before spending the money, as it’s considered a second mortgage on your home.

“The key to using a second mortgage effectively is to borrow only what you need, have a clear plan to pay back the loan, and use the money to improve your financial picture,” Reich says.

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