Mortgage rates have risen to a new two-decade high, delivering more pain to the struggling housing market.
The average 30-year fixed-rate deal increased to 7.57 percent, according to new data from government-backed lender Freddie Mac.
This is the fifth consecutive weekly increase, and the highest rate since 2000.
Sam Khater, Freddie Mac’s chief economist, said the housing market remains “fraught with significant affordability constraints” – warning that purchase demand remains at a three-decade low as a result.
According to the Mortgage Bankers Association, home applications fell by 5.7 per cent in the week to October 4 – the lowest level since 1995.
The average 30-year fixed-rate deal rose to 7.57 percent on Oct. 12, according to data from government-backed lender Freddie Mac
Interest rates have been rising since March 2022, when the Federal Reserve began an aggressive campaign of hikes in an effort to curb inflation and reduce consumer spending.
Mortgage rates have risen about half a percentage point since August, when they topped 7 percent for the first time in nearly a year.
In recent weeks, their climb has accelerated as yields on Treasury bonds have risen sharply.
Two years ago, the average 30-year mortgage rate hovered around 3 percent.
Rising mortgage rates have brought the property market to an effective standstill.
More than 90 percent of homeowners are stuck in a mortgage rate below 6 percent and many have rates closer to 2 or 3 percent — meaning they’re holding back from selling.
A lack of inventory is also pushing up real estate prices, further cutting the purchasing power of buyers hoping to find a suitable home.
Homebuyers may be better off locking in a mortgage rate now, amid the possibility of further increases this year, experts have warned.
Financial expert Andrew Lokenauth told DailyMail.com: ‘If you want to buy, you need to include a fixed rate straight away.’
If the Federal Reserve raises rates again this year, he said, it will flow back to consumers.
He advised that Americans should consider their options. ‘If you close a deal today and rates drop, you can always refinance. And if rates go up, you’ve snagged a good deal and you look like a genius.’
According to the Mortgage Bankers Association, home applications fell 5.7 percent in the week to October 4 – the lowest level since 1995
Lokenauth, founder of TheFinanceNewsletter.comadded that the widespread shortage of homes for sale is also likely to help keep mortgage rates higher for longer.
Jeff Scott, surname First Option Mortgage in Atlanta, Georgia, said the “massive supply and demand issue” is a reason for homebuyers to lock in at the current rate — and they may have more leverage when negotiating a deal.
Prospective buyers should consider asking for a mortgage rate buydown, he said.
Buying out involves a seller agreeing to pay a lump sum of money which is then used to lower a buyer’s interest rate over a set period of time – and it can shave thousands off their loan repayments.
It can be cheaper for a seller to agree to this type of transaction than to lower the price of their property. The cost of the down payment is covered by the seller’s profit on the house sale.
Jeff Scott, of First Option Mortgage in Atlanta, Georgia, said increasing numbers of lenders and sellers are offering a mortgage foreclosure
Offers are divided into two types: permanent and temporary.
Temporary buybacks – which are much more common – see sellers pay to lower the mortgage rate in the first year or two after the sale. After that, the homeowner is responsible for the full rate.
However, a permanent buy-down – much more profitable for the buyer but more expensive for the seller – is when the rate is lowered for the entire mortgage.
Common ways to structure the deal are in three-year, two-year and one-year buyouts – referred to in the industry as 3/2/1, 2/1 and 1/0 deals.
In a 3/2/1, the rate is greatly reduced for the first year, partially reduced for the second and third years, and then returns to the original rate in the fourth year.
Scott said he offered a 2/1 buy-off to several customers.
“What it does is buy the interest rate down by two points in year one, and down one point in year two, before going to the note rate in year three. It takes the stress of a high monthly payment for two years off the buyer.’
Each point usually costs 1 percent of the loan amount and is worth a 0.25 percentage point reduction in the rate.
Take out a $300,000 loan at 7.57 percent. If the seller buys two points, it costs $6,000 and lowers the buyer’s interest rate to 7.07 percent.
This will lower the monthly principal and interest payment from $2,112 to $2,010 – which is a savings of $102 per month and $36,720 over 30 years.