If you are thinking of buying a home, the one thing you will have to consider is interest rates. High-interest rates could be disastrous if not well planned for. That’s because they make your loan or mortgage expensive. Besides, with an understanding of how the rates are likely to change in the future, you can easily plan for a monthly payment strategy that works for you.
What are Interest Rates, and Why is it Important to Know about Them?
An interest rate is a percentage of a loan charged to the borrower. It is usually expressed yearly as a percentage of the outstanding loan. Interest rates are applied to tell the public and investors the costs they will incur for borrowing and the rewards they will enjoy for saving. Therefore, if you’re hoping to buy a home on a mortgage, checking on the interest rates to understand the extent of your financial capabilities is a must-do thing.
Current Interest Rates and Factors Influencing Interest Rates
Well, the interest rates are determined by the Federal Reserve, and as of 24th October 2022, it was 7.279%. Before looking at the future of interest rates, it is essential first to understand the factors influencing the rates. That is, knowing what makes the Federal Reserve raise or lower the interest rates.
- Supply and Demand
Borrowers’ demand and supply of credit will determine the Federal Reserve’s direction when setting interest rates. A rise in demand or a fall in the supply of credit will increase interest rates. On the other hand, if the credit supply is higher or its demand has declined, the interest rates will fall.
- Monetary Policy
Governments have interventionist approaches when they want to drive certain aspects of the economy. The Federal Reserve tends to influence interest rates through open market transactions. That is, selling or buying US government securities. If the Federal Reserve buys more securities, the interest rates will decrease, while the interest rates will rise if they sell the securities held.
Rising inflation consequently leads to high-interest rates. The reason is that lenders want to compensate for the decline in the purchasing power of money paid to them in the future. If the inflation rate declines, then it is likely the interest rates will be reviewed downwards to reduce borrowing costs and propel economic growth.
How to Tell What Could Happen in the Future?
The current economic outlook in the United States is that there is high inflation. Despite government efforts, inflation is expected to persist well into 2023. With inflation being a significant contributor to changes in the purchase value of money, it is likely lenders will opt for higher interest rates to mitigate the risk of losses in the future.
Again, government interventions through the Federal Reserve will be geared towards lowering inflation. One of the applicable techniques is increasing interest rates to get excess money from the market. By 19th October 2022, the Federal Reserve had already announced a 0.75% increase in interest rates. This was the third time in a row, and all indicators show there could be a further rise in interest rates as we move into 2023.
Going by these three indicators and already what is happening in the market, it is evident that interest rates in the coming year could be high, thus increasing housing costs for buyers on credit. As such, this may not be the most appropriate time to think of a mortgage. Nevertheless, it is essential to note that the rising interest rates could be high for the first and second quarters of 2023. In the third and fourth quarters of 2023, inflation in the United States is expected to reduce, leading to lowering interest rates.
How Interest Rates Impact Mortgage Rates
Interest rates affect mortgage rates, influencing the entire housing market. When the interest rates rise, lenders will push the extra costs to the borrowers. That means the increased interest rates will be squeezed in as mortgage rates. As the interest rates rise, the mortgage rates increase, which means the mortgage costs also rise. On the other hand, a decline in interest rates will lead to lower mortgage rates, reducing the costs of mortgage payments.
What are the Current and Future Mortgage Outlook?
According to the National Association of Home Builders and their counterparts in the Mortgage Bankers Association, the estimated interest rate for an average 30-year fixed period is about 5.5% in the fourth quarter of 2022. The rates are at their highest level in more than 20 years. As the government continues to put measures that will help combat inflation, the rates will be expected to rise even further.
As we move towards the end of 2022 and into the beginning of 2023, all indicators show the Federal Reserve will not be seeking to review the interest rates downwards but upwards, thus spelling doom for mortgage takers. Therefore, it is wise to note that the American housing market isn’t at its best.
However, it is predicted that the government’s monetary policy will begin to show positive results of decreasing inflation by mid-2023. When that happens, the United States will likely experience a short recession, and the rates could decline. That spells the most appropriate time to buy a house by taking a mortgage.
What Do Mortgage Lenders Consider When Giving Credit Financing?
Lenders are always keen on the best mortgage rates to offer their clients. As such, they consider certain things when determining their customer’s mortgage rates. Some essential considerations that help lenders know what mortgage rate to accord you include the following;
- Credit Scores: High credit score means you will receive lower interest rates, while a low credit score will have you pay high-interest rates.
- Home Location: Where you live is also a key determinant of your mortgage rate. Some states have higher rates than others. Besides, rural areas could have a different rate from cities. As such, it would be wise to do due diligence rather than assuming the same rate.
- Loan Amount & House Price: More expensive homes are more likely to attract higher mortgage rates than less expensive homes.
- Down Payment: The more considerable the down payment, the lower the interest rates. A down payment of 20 percent and above is considered most appropriate.
- Loan Term: Shorter repayment periods attract lower interest rates and vice versa.
- Type of Interest Rate: Whatever interest rate one must pay on credit extended to them will also depend on whether it is adjustable or fixed.
- Loan Type: Depending on your loan, the mortgage or interest rates could be higher or low. The various types of housing loans include FHA, VA, USDA, and conventional loans. Mortgage rates for conventional loans seem to be higher than the others, especially where the down payment for the conventional loan is below 20 percent.
Why I Need a Broker When Taking a Mortgage
While one doesn’t need to have a mortgage broker, it could be advisable to have one. Besides, some lenders could have a demand for transactions through a broker. Here are some reasons why a mortgage broker is essential.
- Mortgage brokers have the resources and ability to do due diligence on the best credit facility for your housing project.
- Brokers are professionally qualified and regulated, giving you reassurance in their advice on selecting the most suitable mortgage.
- Brokers can access exclusive products that you, as a client, may not have.
- Using a broker ensures you have a hassle-free process.
- Brokers offer themselves at the customer’s convenience, offering you the best services.
- Brokers will be loyal to you and can use them for broader financial advice.