While the housing market continues to appreciate, buyers seem plentiful and inventory limited, will 2021 be the year that see’s an increase in interest rates? While time will tell, it is interesting to note what is happening with the market.
For one, interest rates right now are one of the biggest drivers for buyers, especially first time owners. An interest rate can significantly affect a mortgage payment, especially with record high home prices. For example, consider a home that sells for $300,000. At 3.0% with a 10% down payment, the principal and interest on a 30 years loan would be $1138/ month + PMI. At 3.5% for 30 years, it jumps up to $1212 + PMI. At 4.0%, $1289 + PMI. Of course, this does not take into consideration property taxes, insurance or HOA dues. Additionally, not every buyer will have 10% as a down payment. Many will put down 5% and others 3%, increasing the monthly mortgage payment and PMI. The higher the interest rate goes, the higher the monthly payment – increasing nearly $75 for half a percent increase.
However, according to MSNBC, interest rates rose at the fastest pace last week in over a year. “The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.23% from 3.08%, with points increasing to 0.48 from 0.46 (including the origination fee) for loans with a 20% down payment.” said the article.
As the economy begins recovering from the pandemic, the market expects economic growth and inflation, which in turn can drive higher interest rates. This has also affected the 10 year treasury yield, which has been increasing and is a considerable factor for interest rates.
However, the Fed continues to maintain that interest rates will remain low as the economy continues to recover. Based on these factors, we can expect some increase in interest rates throughout 2021, however, it should remain conservative. How home prices will be affected ultimately is also yet to be seen. The market currently has a shortage of inventory and a strong demand from buyers, which coupled with low interest rates, has made it very competitive.
Source Article: https://www.cnbc.com/2021/03/03/mortgage-application-demand-stalls-as-interest-rates-surge-.html