Applications for new home loans and refinancing jumped 12% week to week as homebuyers and borrowers avoid getting high interest mortgage loans.
Mortgage interest rates continued to rise last week, which led many homebuyers to move faster into closing on their home purchases. Meanwhile, homeowners scrambled to refinance their outstanding mortgages. Although this might seem counterintuitive at first glance, many are making this move to avoid taking out high interest mortgage loans.
Last Week’s Average Mortgage Rates
As of February 4, the average rates were as follows:
- 30-year fixed rate: 3.84% (+0.06% from the previous week)
- 15-year fixed rate: 3.23% (+0.05%)
- 5/1 adjustable-rate mortgage (ARM) rate: 2.85% (+0.03%)
- 30-year fixed jumbo rate: 3.84% (+0.06%)
- 30-year fixed-refinance rate: 3.87% (+0.12%)
The 30-year fixed rate (with conforming loan balances of $647,200 or less) has reached its highest level since March 2020 at 3.84%. Meanwhile, the 30-year fixed rate for jumbo loans (balances greater than $647,200) increased by 0.06% to 3.84%.
Because of the persisting surge, mortgage applications rose by 12% on a seasonally adjusted basis week-over-week, according to Mortgage Bankers Association (MBA). Meanwhile, refinance applications increased by 18% week-over-week, though the volume was still 50% lower from the same week one year ago.
In MBA’s breakdown of the types of mortgage applications:
- Refinance share increased to 57.30% (from 55.80% the previous week)
- ARM share rose to 4.50% of total applications
- Federal Housing Administration (FHA) loan share decreased to 7.70% (from 8.60%)
- Department of Veteran Affairs (VA) loan share went down to 9.10% (from 9.90%)
- United States Department of Agriculture (USDA) share lowered to 0.40% (from 0.50%)
The average loan size reached a new high of $441,100 as well. MBA cited the hot market as the cause: the low inventory levels and quick growth of home prices are pushing loan amounts to go higher.
Why Did Interest Rates Go Up Last Week?
Experts say that mortgage interest rates went up last week because of high inflation and expectations that the Federal Reserve will raise interest rates many times this year.
December 2021 saw inflation in the US hit a 40-year high. The consumer price index, which measures changes in the cost of food, housing, gasoline, utilities, and other goods, increased by 7% over the past 12 months. Prices were up by 0.5% just from October 2021.
Inflation and mortgage rates usually go hand-in-hand, with the former pushing up the latter. The combination of low mortgage rates and high inflation we have seen in 2021 was rare and is not going to last into 2022.
Interestingly, both phenomena were caused by the COVID-19 pandemic. In 2020, the increasing concern about the pandemic’s economic impact drove mortgage rates to fall 16 times that year alone. Rates then gradually rose in the following year but stayed below pre-pandemic levels.
As for inflation, what caused it to rise in 2021 was the pandemic’s continuing economic impact, disrupting supply chains and delaying shipping. Labor shortages and surging consumer demand further aggravated the issue. While these symptoms are only temporary, experts believe that high interest mortgage loans will soon come back because of The Fed.
The Federal Reserve
The Federal Reserve (also known as “The Fed”) acts as the central bank of the US and has always had a lot of influence on mortgage rates. In December 2021, it announced that it will reduce the monthly pace of its bond purchasing program. The decision was made after considering “inflation developments and the further improvement in the labor market.”
The Fed acknowledged that its policy may change based on the Omicron and other variants’ impact. Still, this announcement confirmed expectations that high interest mortgage loans are bound to make a comeback this year as the economy recovers.
What the Rising Mortgage Rates Mean for Investors
As an investor, you need to keep tabs on news like this to avoid taking out high interest mortgage loans. So how will the rising mortgage rates affect you and your investments?
If You Are Selling a Property
For house flippers and wholesalers, you may have an easier time finding a buyer during this period. Homebuyers would want to close on the transaction quickly before mortgage rates reach and possibly exceed 4%. But even if the average rates reach this number, its effects on the property’s market value and affordability would not be as significant, as long as the increase is less than 1%.
If You Are Holding Your Property
Meanwhile, investors with outstanding mortgages that have interest rates over 4% can get cash-out refinance. Even if you save a fraction of a percent on your interest rate, you will be able to save thousands of dollars in the long run. You can also use the refi to fund your next investment.
If You Are Buying a Property
For investors who are looking for a new property, the rising mortgage rates may lower your potential cash on cash returns. However, this is something you should not worry about at the moment, even if they reach 4% as the difference would be insignificant.
For example, you applied for a 30-year fixed mortgage on a $360,000 home at this week’s rate of 3.84%. Your monthly mortgage payment would be $1,349, assuming you will also make a 20% down payment. If you wait until the mortgage rate reaches 4%, your monthly payments would be $1,375—a mere difference of $26.
The one thing that may affect investors, albeit indirectly, would be the job and wage growth. Ideally, the growth rate of employment and wages should match the inflation rate. While the unemployment rate stayed low at 4%, wages only increased by 5.7% year over year which is lower than the 7% inflation rate. Homebuyers and tenants who did not get at least a 7% raise may have a hard time affording a flipped home or a higher-priced rent.
The Bottom Line
High interest mortgage loans are becoming inevitable as the economy recovers. Investors who are looking to refinance may want to take advantage of the mortgage rates now before they reach 4%. However, even if these rates rise to this number, those who are buying and selling their investment properties would not notice the change in their returns and property values.
Even if you are in a rush to apply for a mortgage, it is important to pick the right lender that will give you the best terms available. You can use a mortgage calculator, which you can find on Mashvisor, to project how the new rates can affect your profitability. To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.