With interest rates hitting record lows of 2.72% and lower, 2020 was a peak year for homebuyers. Especially first-time buyers took advantage of the historic rates to get started as homeowners—but more experienced buyers and those looking to refinance did, as well.
The housing market is likely to look different in 2021. One of the reasons is that interest rates on mortgages are slowly creeping up again. However, this can be confusing to homebuyers and sellers who might not understand how the market works. Fortunately, the real estate professional can be a great educational resource who can advise his or her clients about the causes of fluctuations in mortgage rates.
So what exactly contributes to rising interest rates?
Falling bond prices
U.S. Treasury Bonds are guaranteed by the U.S. government, which makes them attractive to investors. Mortgage prices are determined by bond prices. When bond prices start to fall due to factors such as market conditions, the economy, and political and current events, interest rates rise.
Concerns about inflation
The U.S. Federal Reserve is tasked with maintaining the supply of credit and money in our country. Due to the federal COVID-19 stimulus programs, it printed more money last year to ensure sufficient cash flow. Historically, prolonged intervention by the Federal Reserve in this manner has heralded a general increase in the prices of services and goods. In 2020, the inflation rate was 1.4—but in 2021, it’s steady at 1.7, according to the U.S. Inflation Calculator. And rising inflation has a direct impact on interest rates, which are then also increased.
The impact of COVID-19 vaccines
Think healthcare has nothing to do with home financing? Think again. With a growing number of Americans getting the vaccine, the economy appears to be getting stronger—and a stronger economy usually equals rising interest rates.
What does this mean for homebuyers?
As we’ve seen, market conditions, the economy, politics, current events, and even public health are all important to mortgage rates. And as the economy expands and investors’ confidence grows again, the historically low rates of 2020 are likely to be a thing of the past. So for homebuyers who have the money for a down payment on a home, it’s advisable to consider buying now before rates increase even more.
Factors that are specific to your clients’ personal situation
At the same time, there are factors that are specific to your clients’ personal situation that impact the exact rate a mortgage lender will offer them, as the Consumer Financial Protection Bureau explains.
Homebuyers’ credit scores are extremely important—the higher their credit score, the lower the rate they’ll be offered. Additionally, their down payment, the home price, and the loan amount will also play a role. As a rule of thumb, the less they borrow and the more of their own money they can contribute, the lower their rate.
The factors determining interest rates change rapidly, and Escrow Hub is connected to resources with up-to-date information that can benefit you and your clients. Please contact us at Escrow Hub when you need more information, and we help!