As January 2022 came to a close, mortgage rates were notably on the rise. According to Freddie Mac (a major mortgage company), interest rates for a 30-year mortgage rose to 3.56 percent by the end of the month, which is the highest they had been since March 2020—just as the COVID-19 outbreak and its corresponding economic consequences were beginning to unfold.
Compared to where interest rates were in the past, these rates are still incredibly low. In the early 1980s, for example, rates reach as high as 18 percent (however, houses were also much cheaper at the time). Still, with mortgage rates back on the upswing, many people might be wondering whether or not now is the right time to buy.
So, keeping the current mortgage rate trends in mind, is it a good idea to get a mortgage?
As you’d probably expect, there are several factors you’ll need to keep in mind. Let’s take a closer look:
Mortgage Rates Are Still Near the Lowest They’ve Ever Been
It’s very easy to look at the headlines—“Mortgage Rates Are on the Rise”—and assume that buying a home is something that is out of reach. However, it is important to note that even though these rates are increasing, they are still incredibly low.
Other than a brief period in 2013, the past three years have been by far the most affordable time to take out a mortgage. Though housing costs have indeed been high, the cost of borrowing has been very low. Rates below 4 percent are a historical anomaly. In fact, prior to the financial crisis, the lowest mortgage rate ever reached was about 5.5 percent. And, as suggested, mortgage rates for a 30-year loan were as high as 18 percent in the 1980s. So, relatively speaking, now is still a great time to apply for a mortgage.
It’s Unlikely Mortgage Rates Will Drop Below 3 Percent Again—At Least for a While
Mortgage rates were already steadily decreasing before the COVID-19 outbreak. In November 2018, rates were around 4.8 percent and by the very beginning of the outbreak, they dropped down to around 3.6 percent. By December 2020, these rates reached an all-time low, averaging about 2.6 percent.
What caused mortgage rates to drop so dramatically? Frankly, there were quite a few factors—some of which are unlikely to ever rematerialize. A genuine shortage of housing stock, an influx of cash caused by government stimulus, and monetary actions taken by the Federal Reserve all helped cause these rates to drop.
There is still a notable supply of housing stock. However, with future stimulus being unlikely, inflation on the rise, and the Federal Reserve hinting at future rate hikes (which are eventually reflected in the mortgage industry), it is unlikely that the “perfect storm” that caused rates to drop below 3 percent are likely to occur again. So with mortgage rates unlikely to be lower than they are right now, at least for the foreseeable future, it can be easy to justify applying for a mortgage today.
Mortgage Rates Certainly Matter—But Your Personal Finances Matter Even More
There is no denying that mortgage rates are very important. These rates, effectively, describe the cost of borrowing, and the higher they are, the more expensive it will be to obtain a long-term loan. However, mortgage rates are just one of many factors you should consider when deciding whether you want to apply for a mortgage. In most cases, your personal finances will be even more important.
When you hear “mortgage rates are 3.55 percent”, that doesn’t necessarily mean that is the rate you’ll be guaranteed to pay. That number is simply an average. If you have a poor credit score, for example, you might be able to still obtain a mortgage but you can usually expect to pay a higher rate. Other variables, such as your debt to income ratio, your monthly income, your ability to make a down payment, and more, can all influence the rate you end up paying.
Additionally, you should remember that the mortgage rate you apply for will not necessarily be permanent. In the future, you will have the option to make completely change your mortgage rates through refinancing. This means that you are not necessarily “locked in” to the same rate forever, so if mortgage rates ever do end up coming back down, you will likely have a few options available.
We can’t tell you whether it is the right time for you, personally, to buy a home—there are so many personal factors you’ll need to keep in mind. What we can tell you is that mortgage rates are still remarkably low, even if they’ve experienced a small increase. For many people across the United States, that means now is a great time to buy a home.
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