Mortgage rates have surged for the sixth consecutive week, according to Freddie Mac. The average rate on a 30-year fixed mortgage has risen more than a percentage point during September, from 5.66% on Sept. 1 to 6.7% currently.
In a grim indicator, we’ve had to adjust the Y-axis higher on our mortgage rates graphic for two weeks in a row to keep up with soaring interest rates. Mortgage applicants are also paying more money upfront to buy discount points. Here are the current mortgage interest rates, as of Sept. 29:
— 30-year fixed: 6.7% with 0.9 point (up from 6.29% a week ago, up from 3.01% a year ago).
— 15-year fixed: 5.96% with 1.3 points (up from 5.44% a week ago, up from 2.28% a year ago).
— 5/1-year adjustable: 5.3% with 0.4 point (up from 4.97% a week ago, up from 2.48% a year ago).
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“The uncertainty and volatility in financial markets is heavily impacting mortgage rates. Our survey indicates that the range of weekly rate quotes for the 30-year fixed-rate mortgage has more than doubled over the last year. This means that for the typical mortgage amount, a borrower who locked in at the higher end of the range would pay several hundred dollars more than a borrower who locked in at the lower end of the range. The large dispersion in rates means it has become even more important for homebuyers to shop around with different lenders.”
— Sam Khater, Freddie Mac’s chief economist, in a Sept. 29 statement
There’s no doubt that wide interest rate dispersion is a significant takeaway for today’s mortgage applicants, but it’s also secondary to the main point: Skyrocketing interest rates are compounding the existing housing affordability crisis, with 30-year fixed mortgage rates racing closer toward 7%. Homebuyers are either priced out of the current real estate market, or they’re forced to look at cheaper homes to keep their monthly payments within a reasonable budget.
And it may not be possible to find a home that’s priced low enough to offset the impact of rising mortgage rates. A homebuyer who was applying for a $400,000 mortgage when rates were at 3% would have to reduce their borrowing budget to $250,000 to keep their monthly payments the same at today’s 6.7% interest rate. That’s a loss of $150,000 in purchasing power, per an analysis using a mortgage calculator, and it goes without saying that a home at a lower price will look much different from one at the higher end of the spectrum.
For housing affordability to improve, home prices have to plummet significantly, and inventory needs to improve miraculously. Even with home prices beginning to decelerate, housing inventory remains low because many homeowners are reluctant to sacrifice their 3% mortgage rate by selling.
The Federal Reserve’s plan to curb inflation (and in large part, home price appreciation) through interest rate hikes may well result in a housing market correction, but that strategy takes time. There’s simply no way to keep housing payments affordable in the current rate environment, no matter how much rate shopping buyers do or how many discount points they buy. For now, many homebuyers are forced to wait on the sidelines — or look into alternative borrowing options like adjustable-rate mortgages.
[Compare: Mortgage and Refinance Rates in Your Area.]
Indicator of the Week: Paying an ARM and a Leg
Though the average interest rate on a 5/1 adjustable-rate mortgage eclipsed 5% for the first time since 2009 this past week, ARM rates remain meaningfully lower than fixed mortgage rates. As a result, more homebuyers are turning to ARMs to achieve lower monthly payments and cushion their purchasing power.
The share of mortgage applicants who chose an adjustable rate rose to 10.4% this past week, according to the Mortgage Bankers Association, meaning that about 1 in 10 homebuyers is opting for an ARM over a fixed-rate mortgage. The growth in ARM market share closely correlates with rising fixed mortgage rates, as seen in the graphic below.
“With the recent jump in rates, the ARM share reached 10% of applications and almost 20% of dollar volume,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, says in a statement. “ARM loans remain a viable option for qualified borrowers in this rising rate environment.”
The monthly principal and interest payment on a $300,000 mortgage is much lower today for borrowers who choose an adjustable-rate mortgage: $1,665 at the current ARM rate of 5.3%, compared with $1,935 at a 6.7% fixed rate. However, the interest rate on a 5/1 hybrid ARM can change after the initial five-year fixed-rate period. This translates to the added risk that mortgage payments will rise over time, and ARM borrowers must be confident in their financial ability to handle long-term interest rate volatility.
Still, mortgage applicants who plan to sell their home or refinance within five years may see an ARM as a smart alternative. This would essentially allow them to take advantage of lower ARM rates today while switching to a fixed-rate mortgage before their monthly payments rise.
But one more thing to consider: Will home prices stay steady — or drop — within the next several years? If so, it could be difficult to sell or refinance without losing money due to lower equity. If you’re shopping for a mortgage now, it’s important to consider all possibilities with your mortgage loan officer and a third-party financial advisor.
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Mortgage Rates Rise to 6.7%, Continuing Upward Streak originally appeared on usnews.com