The number of people who are looking to purchase new homes has dropped, as mortgage interest rates have gone over seven percent for the first time in nine years. This increase in interest rates has also left some lenders worried that more borrowers may begin to default on their mortgages, thanks to a cooling economy. Despite these concerns, however, mortgage defaults are only increasing gradually, although some fear that increasing interest rates could have a negative impact on borrowers as time goes on.
Record High Interest Rates
The interest rate for 30-year fixed rate mortgages has gone above 7% for the first time since 2013, and is expected to hit a high of 7.125% this week. This has come at the same time that mortgage credit availability has declined dramatically, resulting in fewer people borrowing to purchase homes. The number of so-called “jumbo” loans was hit the hardest, which are loans that exceed the limits for a conforming loan set by the Federal Housing Finance Agency and, thus, cannot be guaranteed by the likes of Freddie Mac or Fannie Mae, thus requiring more stringent credit requirements.
The Reason for Rising Interest Rates
The biggest reason for the rise in interest rates is due to increases in the Federal Reserve interest rate, which is the rate at which banks loan money to one another. The Fed has been steadily increasing the interest rate in order to stifle the effect of inflation, which has the side effect of making all loans, including mortgages, more expensive. This makes it harder for people to borrow to purchase homes, making otherwise affordable loans into financial problems they may struggle to pay off.
The Impact of Higher Mortgage Interest Rates
The rise in mortgage interest rates has driven off many lower-income borrowers who may have been hoping to purchase a new home. This has caused a decline in the number of people seeking to purchase a home, and may contribute to a gradual increase in the number of people defaulting on their loans in the future, especially for those who currently have an adjustable rate mortgage. It also makes it much harder for people with mortgages to refinance their loans, given that most current borrowers got their mortgages at lower interest rates than are available right now. Adjustable-rate mortgages have become more appealing compared to fixed-rate mortgages in the short run due to lower starting interest rates, but some fear this will result in greater levels of defaults in the future as their interest starts to increase over time.
What May Happen in the Future
Unfortunately, the Federal Reserve does not seem like it will ease up on increased interest rates anytime soon, and may continue to raise them further. As a result, mortgage interest rates will likely continue to rise, and the number of people making applications for mortgages will decline. However, should the rate of inflation begin to level off or drop, it is likely that this course will reverse, and mortgage rates will be able to fall once more.
At Liongate Homebuyers, we assist our clients with a variety of services related to buying and selling real estate, including purchasing homes for cash. We have experience handling real estate financing, especially for developers and house flippers. If you are interested in selling your home for cash, please contact us at 516-548-6553, or visit our contact page.
