How to Handle Higher Mortgage Rates

The last year has seen much higher short-term interest rates as the Federal Reserve acted decisively to address inflation.

Mortgage rates - like other lending rates, such as a home equity line of credit or a credit card rate - are not necessarily driven by short-term rates. In the case of mortgage rates, the 30-year US Treasury rate (hyerlink) has more of an impact on the actual rate than you may be offered, whether you are looking at a 30-year fixed mortgage rate or something shorter, such as a 5 year Adjustible Rate Mortgage (ARM).

Rates are going up though, and home prices are coming down. The decline in real estate prices, however, may be more due to a change in the market from COVID times when people wanted to spread out. Another reality impacting home prices is that not everybody is going back to the office.

Against this backdrop, there are three pieces of general advice that should hold especially true for those seeking a mortgage.

First, do not expect that interest rates will come down soon and that you will be able re-mortgage your home at a lower rate in a year or two. Even if short-term rates come down, longer-term interest rates are likely to remain at higher levels than they have been at the last two decades. This will affect your ability to re-mortgage.

Second, you therefore should not buy more home than you can afford based on the incorrect assumption that rates may return to what they were pre-pandemic. Your best friend may have locked in a mortgage at 3% but it may be a century before anyone gets a rate like that again.

Third, consider different products, including a 15-year or a 20-year mortgage, and a 5-year ARM. These products may offer lower interest rates and may be more appropriate for you if you do not plan to stay in your home indefinitely.