Mortgage rates have reached new records in recent years, putting in question the real estate market. Current borrowing rates are hovering in the 6-7% range, while rates were as low as 2-3% only a few years ago.
Mortgage rates rising are largely the result of the Federal Reserve raising its rates. To slow inflation down, the Fed wanted to make borrowing more expensive. According to CNET:
As inflation surged in 2022, so too did mortgage rates. To rein in price growth, the Federal Reserve began bumping up its federal funds rate — a short term interest rate that determines what banks charge each other to borrow money. By making it more expensive to borrow, the central bank’s goal is to reduce prices by curtailing consumer spending.
During its July 26 meeting, the Fed initiated a 25-basis point (or 0.25%) hike to its federal funds rate, marking its 11th increase in the current rate hiking cycle. The most recent increase could have an impact on mortgage rates, but experts say the markets may have already factored it into rates.
While rates are rising, prospective borrowers can still take actions to improve their chances for a lower rate. Forbes reports:
Home buyers can make several moves to improve their finances and qualify for competitive rates. One is having a good or excellent credit score, which ranges from 670 to 850. Another is maintaining a debt-to-income (DTI) ratio below 43%, which implies less risk of being unable to afford the monthly mortgage payment.
Further, making a minimum 20% down payment can help you avoid private mortgage insurance (PMI) on conventional home loans. If you can afford the larger monthly payment, 15-year home loans have lower rates than a 30-year term.
While borrowing money is becoming more expensive, there is a silver lining for some. Interest on cash in savings account is also rapidly growing. Some high yield savings account are now offering 4% returns, which was unheard of only a few years ago, where customers could only hope for 0.5% at most.
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