What you should know about mortgage costs, and how to lower yours
By Jamie Thompson
Mortgage rates here in Chandler and across the country have been on the rise for a while. This has caused some potential sellers to put their plans on hold – no one likes jumping from a 3% loan to one in the 6% range.
Is that the right strategy? What’s going on with rates anyway, and are there any workarounds for buyers? I’d like to break all this down and give you my take.
Rates are up, but still historically low
As of June 13, 2023, the average 30-year fixed mortgage rate in Chandler is 6.84%, up from 5.52% a year ago. The average 15-year fixed rate is 6.09%, up from 4.67% in June 2022.
I’ve been helping people buy and sell homes for over 20 years, and have seen rates fluctuate a lot in that time. In fact, when I first got into the real estate business, 30-year mortgages were about where they are now, and the Fed was actively increasing them (this was right after the Dotcom crash and 9/11 attacks). Rates bounced around quite a bit for a while, but rarely dipped below 6%. Eventually, after the 2008 crisis, a 30-year fixed fell to an average of about 5%, and then kept on getting lower.
In 2021, the national average 30-year fixed rate bottomed out at 2.96% – unheard of! That isn’t the norm; it’s the exception. Never in my life or career have I ever seen that, and I doubt I’ll ever see it again.
Although rates are up, they are still relatively low compared to historic trends. The average 30-year fixed mortgage rate has been above 6% for most of the last 40 years, and only dipped below 7% twice from 1980 to 2000. In the last 20 years, rates have been the 6% range about half the time.
Inflation control
Last year, inflation hit a 40-year high, and the Federal Reserve has been trying to bring it down to its target of 2%. It’s been working; over the last twelve months, inflation has been decreasing.
The Fed raises rates in a few ways; one is by setting the Discount Rate. This is an interest rate they charge banks for loans, which causes all rates downstream to be affected. The Fed is expected to continue raising interest rates throughout 2023, bit the pace of rate hikes should slow as inflation continues to improve.
Where rates are headed
Analysts are forecasting that mortgage rates will continue to rise in 2023. The Mortgage Bankers Association believes the national average for a 30-year fixed mortgage rate will increase by about 70 basis points (0.7%) by the end of the year.
The rise in mortgage rates is expected to continue constraining both supply and demand in the housing market, but home prices should remain strong in 2023. Even though demand for housing is lower today, it still outweighs the number of homes for sale.
Ways to Reduce Mortgage Costs
There are a number of ways to reduce your mortgage costs while interest rates are higher. Here are the best ones:
- Infuse more cash. A larger down payment will lower your loan balance and thereby your payment; along these lines, you can pay additional cash toward principal as you’re able. Although your mortgage payment is fixed, the interest portion fluctuates each month based on your balance. Paying down principal reduces this cost, which means a larger portion of each payment will further reduce your loan balance and overall cost.
- Shorten your term. A shorter-term mortgage will result in a higher monthly payment, but the interest rate will be lower and you will pay off your loan much sooner. If you can afford a higher payment, this method will save you a lot of money on interest.
- Rate Buydown Credits. A rate buydown credit is a fee a borrower can pay to reduce their mortgage rate for a period of years. Sometimes, you can negotiate with the seller of your new home for a portion of this cost. Although you can buy one for the life of a loan, we’d recommend a 1- to 3-year credit for a 1 or 2 percent reduction in interest. By the time the credit expires, you may be able to refinance for a lower fixed market rate.
Bottom Line
Mortgage rates are indeed higher than they were last year. This has affected buyers’ purchasing power, and caused many people to hold off on buying and selling. Rates are still relatively low compared to historic trends, but we’ve been accustomed to even lower rates for a long time.
Although I understand why some sellers are hesitant right now, rates could very well be higher down the road. For this reason, I encourage anyone considering a move not to hesitate, and to take advantage of the cost-reduction strategies listed above.
If you’re considering selling now or in the future, give me a call today at 602.753.0177. I’m eager to get to know you and help make your next move a success!
