While we are accustomed to seeing mortgage rates at record lows, the situation is swiftly changing. For the first time since 2009, the average 30-year fixed mortgage rate has surpassed 5% and is currently sitting around 5.25 percent. This is a significant increase in a short period. How can you prepare for an increase in interest rates? What will this mean for the real estate market? Your retirement plans?
Historical Interest Rates
A mortgage rate of 5.25 percent may seem absurd at the moment, given that rates have been historically low in recent years. In the previous 40 years, though, we’ve seen rates as high as 16% and as low as 3%, a significant range. Since 1971, the historical average 30-year fixed mortgage rate has been just under 8%, which implies that our more recent lows and even our present “feels high” rate of 5.25 percent are still significantly below this historical average. Even in more recent years, such as 2006-2008, the average mortgage rate was in the 6-percent area.
This is a nice reminder that mortgage rates fluctuate and have been far higher than they are present. Remember that even if interest rates increased by a couple more percentage points, they would still be below historical norms.
How Much Will Mortgage Rates Increase?
No one can accurately forecast how the market will develop and where mortgage rates will settle. When we consider how much worse rates may grow shortly, many real estate experts believe we will conclude the year with an average of 5.5%. As long as inflation persists, the Fed will continue raising interest rates until it is controlled. This is not a precise correlation with mortgage rates, but it can serve as a leading signal. Due to the required rise in interest rates to combat inflation, it is not inconceivable that rates might approach or even surpass 6% by the end of the year. Even while these rates are greater than usual, they are still historically below average.
What impact do high mortgage rates have on the housing market?
With increased mortgage rates, we anticipate a minor cooling in the real estate market. Initially, when rates rise, fewer people will be able to purchase a house at the current asking price, resulting in a smaller pool of buyers.
As a result, house prices would decrease modestly as a lagged effect. Shortly, it may take slightly longer to sell a property than in recent times. In the long run, home values would begin to decline slightly. Is this a certainty? No, especially because consumers are resilient, and if unemployment remains low and wage growth continues to rise, we may see less of an effect.
How Increasing Mortgage Rates Affect Your Investments
What impact will higher mortgage rates have on your assets and retirement funds? First, while applying for a mortgage, be mindful of the time. A 5/1 or 7/1 ARAR +2.7%M (adjustable-rate mortgage) may be a suitable choice since it can offer lower rates than existing mortgages for a set period, after which the rates become variable. Should you overpay on your mortgage if your interest rates are rising? You’ll need to address this with a financial adviser, as it relies on your unique circumstances, debt level, and retirement account balances.
Overall, with mortgage rates on the rise, now is the time to speak with both a financial planner and a mortgage specialist to ensure you have a strategy to meet your future housing and financial demands.