How mortgage rates affect buying a home

Mortgage rates, also called interest rates, have risen consistently throughout 2022, which has made buying a home or refinancing more challenging for many types of borrowers.

Knowledge about how  work and what influences these rates can help empower borrowers to make the best decisions for their unique situations.

What's in this article?

What determines mortgage rates?
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How do mortgage rates affect the housing market?
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What does this mean for home prices?
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How to get the best possible rate on a mortgage
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Prepare for a home purchase or refinance with Compass Mortgage
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In this article, we’ll take a look at how s affect the housing market, what determines  and what this means for home prices.

What determines mortgage rates?

Several factors influence interest rates for home mortgages, either directly or indirectly.

Some of these factors include:

  • Federal Reserve actions
  • Economic growth or challenges
  • Inflation
  • Mortgage-backed securities
  • Personal factors, such as credit score and debt
  • Individual mortgage terms, such as 15-year or 30-year loans

You’ve probably heard a lot of news in the past year about the Federal Reserve raising its funds rate.

The Fed adjusts the funds rate as part of an effort to stabilize the economy through interest rates. It has raised rates several times in 2022 to try to curb high inflation.

While the funds rate does not directly influence mortgage rates, it is considered an indirect influencer because both are affected by similar economic factors.

In this most recent case, inflation is the biggest driving factor. As inflation increases,  generally increase as well.

Beyond the larger economic factors, there are several personal factors that influence . 

Rather than focusing on the latest mortgage news when you are interested in purchasing a home or refinancing, working closely with a trusted mortgage lender to get a personalized rate can help you achieve your homeownership goals.

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How do mortgage rates affect the housing market?

Mortgage rates affect both affordability and home demand.

During the height of the Covid-19 pandemic,  dropped dramatically in response to both economic uncertainty and the Federal Reserve’s efforts to help boost the economy by lowering the funds rate.

As a result, home demand skyrocketed. The pandemic spurred a lot of goal changes for couples, families and individuals who decided to move to a bigger home or a new town to improve their quality of life.

Persistent home demand and heated competition during this period eventually resulted in record-high home prices, and more and more people were priced out of the market.

On the flip side, the home price increase created more equity in people’s homes, which many tapped into with a refinance loan.

Eventually,  began to increase again in response to rising inflation and the Federal Reserve’s rate hikes.

High home prices coupled with rising interest rates have resulted in slowing home demand, a necessary component to bringing more balance to the market.

What does this mean for home prices?

Home prices are influenced more directly by demand, competition and inventory, but these factors are largely driven by  in the current market.

Generally, as  rise, demand and competition naturally slow down, and inventory can catch up.

Fannie Mae economists predict that year-end home prices will be an average of 9% higher than they were a year ago, which they adjusted from a previous forecast of 16%.

They adjusted their forecast based on current home sales data and rising interest rates, which at the time were hovering at 6.6%.

While home prices may remain high in certain areas, what’s more notable at this point is that the price gains will begin to slow in response to rising rates and slowing demand. 

How to get the best possible rate on a mortgage

The most important factor in determining the “right time” to buy a home or refinance is your own personal financial situation.

You can save on a mortgage regardless of the current market factors as long as you have a good credit score, a sufficient down payment and  careful planning.

At Compass Mortgage, we several options for borrowers that will help you save, including Get Committed® and our 2-1 buydown option.

Let’s take a look at all your savings options.

Check your credit score

Before you head to a lender to get pre-approved for a mortgage, check your credit score.

Your credit score is an important factor in determining your interest rate and loan options. 

A good score proves to lenders you are able to make your payments on time and that you are skilled at managing your credit.

For conventional mortgages, lenders usually want to see a credit score of at least 620 or higher. The higher your score, the better.

You can improve your score by paying down your credit card debt and making sure all your payments are on time.

Get your finances in order

Putting down at least 20% on your new home eliminates the need to pay private mortgage insurance (PMI) and also may reduce your overall loan balance.

The ability to put down more on a home, plus proof of adequate savings, proves to lenders you have the means to comfortably repay your loan.

A borrower’s good financial standing can influence mortgage rates favorably.

Get pre-approved

Pre-approval is the first step in the homebuying process. Getting pre-approved allows you to take a look at how much you can afford and what loan options are available to you.

If your options aren’t quite what you’d like them to be, you can continue to work on your finances and apply again in the near future.

With Compass Mortgage, Get Committed® goes beyond pre-approval to lock in your interest rate and provide a fully underwritten loan commitment before you even find the property you want to buy.

A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and your deal won’t fall through.

2-1 buy-down

A 2-1 buy-down is a financing method sellers may offer to buyers as an incentive to purchase their home.

With this method, the first two years of your mortgage are at a lower interest rate and the third year is your normal, approved rate.

In the first year of the loan, your interest rate will be 2% lower than the approved rate. In the second year, your rate is 1% lower.

Then, in the third year, you will pay the approved interest rate that you agreed on at closing.

The lender will require a one-time fee at closing to make up for the interest they won’t receive in the first two years of the loan. The seller will cover this payment as part of the incentive.

A 2-1 buy-down is a win for buyers because it helps them save money during the first two years of homeownership. However, not all lenders allow this option.

Fortunately, Compass Mortgage allows borrowers to use a 2-1 buy-down to help with the initial costs of homeownership.

Prepare for a home purchase or refinance with Compass Mortgage

If you’re ready to purchase a home or refinance but the news is telling you otherwise, reach out to a trusted, experienced lender to help you achieve your goals.

Apply for a home purchase or refinance today with Compass Mortgage. We promise to be your partner and advocate throughout every step of the lending process.

Together, we will find the most affordable loan for you.

Photo by RODNAE Productions

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