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Potential homebuyers who have been looking forward to the spring selling season may be watching with concern as mortgage rates rise.
According to Mortgage News Daily, the average interest rate for a 30-year fixed-rate mortgage with a conforming loan balance — $832,750 or less — was 6.35%. About two weeks earlier, before the US and Israel launched military strikes against Iran, it was 5.99%.
“High oil prices are not good for mortgage rates,” said Lawrence Yun, chief economist at the National Association of Realtors.
However, a year ago the average rate was higher: 6.82%. And in October 2023 it was about 8%. There are also other signs that affordability has improved, albeit slowly.
Still, for buyers worried that oil-related rates could fall after committing to a purchase and choosing a mortgage lender, there may be ways to mitigate this, experts say.
“Oil drives inflation and inflation drives interest rates”
The rise in mortgage rates over the past two weeks is largely due to the specter of inflation raised by sudden restrictions on the flow of global oil after the outbreak of war. Since some of the oil shipments do not cross the Strait of Hormuz, an important sea canal in the Persian Gulf, prices rose – and with them fears of inflation.
Brent crude oila global oil price benchmark, traded as high as $119.50 a barrel on Monday, up from around $70 before the US-Israeli military strikes. On Friday morning the price was around $100 a barrel.
“The Iran conflict — that’s a big headwind” for mortgage rates, said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “We don’t know how it’s going to turn out. Oil drives inflation, and inflation drives interest rates.”
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Put simply, when investors expect higher inflation, they want a higher return on long-term investments, and therefore the yield on long-term bonds increases – which affects mortgage rates. As of Friday morning, the 10-year Treasury yield was around 4.25%, up from less than 4% before the conflict erupted in the Middle East.
Before that, “I was forecasting 6%.” [for spring] And it stays near that level for the rest of the year,” Yun said. “But oil prices have messed that up.”
Now he expects interest rates to be around 6.5% if the conflict in the Middle East continues or if oil prices remain high.
Possible alternatives to “fixing” an interest rate
For buyers, the uncertainty means it is important to understand how prices may change during the buying process.
Generally, when you receive pre-approval from a lender to borrow a specific amount. Ideally, once you have signed a purchase agreement for a specific home, you can “lock in” the interest rate offered. This means that you are guaranteed that particular interest rate for a set period of time – usually 30 or 60 days – provided there is no significant change to your financial situation before you complete your purchase within that period.
The key advantage of locking in the interest rate is that you know that even if interest rates go up, you will get the agreed-upon interest rate before you close on the house.
On the other hand, if interest rates go down, you will still pay the agreed interest rate.
However, there may be ways to avoid this outcome.
“Consumers should ask [their lender or broker]“If I close now and interest rates get better, what options do I have?” said Rinaldi. “In such a volatile market, it is beneficial for the consumer to know this.”
Some lenders may offer a “float-down” clause, which entitles the buyer to improved terms if interest rates fall by a set amount at settlement before the purchase is completed.
Alternatively, you can sometimes let the interest rate “float,” meaning you are not locked in until you close on the house. The risk is that if interest rates rise, you miss out on the better interest rate you could have secured. The advantage is that when interest rates fall, you can benefit from the lower interest rate.
Note that lenders may charge more for these interest rate options.
Market conditions have improved compared to the previous year
As affordability slowly improves, buyers who were ineligible for a loan a year ago may be in a better position now as interest rates are lower. Property prices are no longer rising as much as before.
“Housing affordability depends on mortgage rates, but also on property prices,” Yun said. “In some places in the country there has been a slight decrease in prices.”
Overall, the market is “much better for buyers this spring than it was last spring,” he said.
“We are seeing more inventory, so buyers have more choices,” Yun said. “And homes stay on the market longer, so buyers have more purchasing power than they did a year ago.”
The average price of a single-family home was $401,800 in February. Based on that amount and a mortgage rate of 6.12%, the February average, buyers would need an income of $93,696 to qualify for a mortgage, according to NAR’s affordability index. The measurement assumes the buyer makes a 20% down payment, which in this case would be $80,360.
This qualifying income amount is lower than a year ago, when the average rate was 6.92% and the median single-family home price was $400,900. At that time, buyers needed an income of $101,616 to qualify, NAR’s affordability index shows.
Of course, lenders consider more than just income when deciding whether to approve a loan, including factors such as credit score, credit history and outstanding debts.
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