Mortgage rates play a very crucial role in the real estate industry. With the way things are going today, what can investors expect in 2022?
Mortgages Have Swiftly Increased in Just a Few Months
US mortgage rates continue to rise astronomically to rates we haven’t seen since January 2019. The average 30-year mortgage went up to 4.42% on March 24, 2022, from its 4.16% just a week before. While that in itself is already quite stupefying, the rates for the same mortgage type shot up to 4.95% the following day, March 25, 2022.
The Federal Reserve has increased the benchmark interest rate by 0.25% in mid-March with more possible hikes in the foreseeable future.
According to Freddie Mac’s chief economist, Sam Khater, home buyers are having a hard time keeping up with the increasing mortgage payments caused by rising mortgage rates and continued real estate appreciation.
To give context to this, here are the mortgage rates for an average 30-year fixed-rate mortgage over the past 12 months:
30-year Fixed-rate Mortgage Rates in the Last 12 Months
- March 2021 3.08%
- April 2021 3.06%
- May 2021 2.96%
- June 2021 2.98%
- July 2021 2.87%
- August 2021 2.84%
- September 2021 2.90%
- October 2021 3.07%
- November 2021 3.07%
- December 2021 3.10%
- January 2022 3.45%
- February 2022 3.76%
For discussion’s sake, let’s say you have a $300,000 loan on a 30-year mortgage. You would have only been paying about $1,301 when the year started. After just one quarter, the monthly average mortgage payment has already gone up to $1,506.
Buyers and real estate investors can expect home prices to continue to climb throughout the year. The unexpected invasion of Ukraine by Russia and other global conditions make predicting near-term movements quite difficult at this time. Even determining ROI on rental property has proved to be a challenge to investors.
Those who were able to purchase properties or have them refinanced earlier in the pandemic benefited the most from the record-low mortgage rates. In contrast, a lot of Americans shelved their plans of purchasing homes mainly because their dollar’s buying power could not cope with inflation and property appreciation.
Despite that, the 2022 US housing market is still experiencing a national shortage in housing supply that cannot keep up with the high demand for homes. The law of supply and demand all the more drives prices up making affordable housing beyond most Americans’ reach.
The continuing increase in mortgage rates coupled with property price increases has already made median mortgage payments 20% higher than a year ago.
Related: 5/1 ARM Loan: What Investors Should Know
Current Mortgage Rate Trends
To understand mortgage rate trends, we also need to understand what drives them to change. Certain factors are involved in the fluctuation of mortgage rates, including a lot of out-of-industry occurrences that impact the global economy.
For instance, the ongoing Russia-Ukraine conflict has adversely affected global supply chains and financial markets, which have also directly affected the inflation rate worldwide. This is felt not just in the outrageous increase in oil prices but also in other economic aspects like plummeting stock prices.
The same could be said for the real estate market. Since inflation is a reality that everyone faces, its effects creep into the industry and have unfortunate consequences for those looking to buy a residential home to live in, investment properties to flip, or an Airbnb business to start.
There’s also the fact that we’re not out of the pandemic woods yet, even if things are starting to look up after two years since COVID-19 broke out. With the Omicron variant threatening to cause another COVID-19 resurgence, the market remains uncertain and somewhat volatile.
That being said, industry experts and analysts predict that the rest of the year will be spent trying to address high inflation. This includes, but is not limited to, raising the short-term interest rate of the Federal Reserve which, to our dismay, leads to increased borrowing costs.
Most experts agree that 2022 will end with higher interest rates as per their annual prediction, but they failed to take into account the unfolding of certain global events. Most 2022 forecasts made prior to March 2022 all claimed that the year will end with a 4.5% mortgage rate increase, but we already made it past that point in Q1 alone. That being said, most experts also agree that we will continue to experience a great deal of volatility in the months to come.
Related: As High Interest Mortgage Loans Loom Closer, Borrowers Are Scrambling to Refinance
Why Do Mortgage Rates Matter?
Anyone who has ever bought a house or considered buying one knows the impact mortgage rates have on a person’s finances. Even a small 1% increase in rates can result in tens of thousands of dollars during the lifespan of a loan, especially if we’re talking about a 30-year mortgage.
We gave an example of how a slight increase could affect mortgage payments a few paragraphs earlier. A $300,000 loan on a 30-year mortgage is already costing a borrower a little over $1,500 now compared to just $1,300 at the beginning of the year. We’re talking about a 1.5% increase in just three months. If you multiply that by 10, 15, 20, or 30 years, you will be overwhelmed at how big a difference that 1.5% makes over time.
For this reason, it is important for home buyers and real estate investors to shop around for the most competitive rates they can afford. That falls under the category of performing due diligence. If you perform extensive research and get accurate data from a real estate website like Mashvisor, great. If you use the website to perform real estate analysis using its investment property calculator, awesome. But to ensure a profitable investment, investors should also take into account mortgage rates.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.
Related: Mortgage Rates: The Real Estate Investor’s Complete Guide
The Bottom Line
With the instability of mortgage rates today, it is very important for real estate investors and homebuyers to look for the most competitive rates they can afford. Looking for the best possible financing options is a huge part of performing due diligence. That, alongside having the right tools and information, can make a world of difference in acquiring a property. 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.