Mortgage Rates and Real Estate Investing

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Whether you’re an investor or a homebuyer, fluctuating interest rates in today’s market may raise concerns. But don’t panic. Sometimes, increased mortgage costs can benefit investors. In the forthcoming sections, we’ll discuss loan types, the role of the Federal Reserve, and how to determine the best rate.

Currently, mortgage rates are rising, averaging 4.82% for 30-year home loans. This is a surge from pandemic lows. Factors like property location, chosen lender, credit score, and ability to include stable rent as income can affect mortgage rates and loan amounts.

Check the table below for average rates and APRs (Annual Percentage Rates) for fixed-rate mortgages:

| Type of Mortgage | Interest Rate | APR |


| 30-year fixed-rate | 3.92% | 4.0% |

| 30-year fixed-rate FHA | 3.14% | 3.95% |

| 30-year fixed-rate VA | 3.33% | 3.6% |

| 20-year fixed-rate | 3.62% | 3.75% |

| 15-year fixed-rate | 3.15% | 3.30% |

| 10-year fixed-rate | 3.14% | 3.34% |

| 7-year ARM | 3.80% | 3.27% |

| 5-year ARM | 3.43% | 2.96% |

| 3-year ARM | 2.94% | 3.20% |

Data sourced from Zillow on June 24, 2022.

When considering rates, pay attention to the terms and any fees advertised. These can affect your mortgage’s interest rate. For example, if you’re purchasing a $250,000 house with a 10% down payment of $25,000, a 30-year mortgage at a fixed interest rate of 3.5% would result in a monthly payment of $1,344.

The Federal Reserve’s decisions primarily determine the broad range and base level of rates. In a robust economy, rates tend to be higher, while during times of economic instability or global concerns, rates may decrease as the Fed aims to stimulate growth.

However, other factors also impact the rates offered to you. Your credit report, down payment amount, and total loan amount can influence the rates. A strong credit score can help secure lower rates, while a down payment of less than 20% may require mortgage insurance.

If you’re applying for a mortgage exceeding $500,000, it falls under the category of a “jumbo loan.” Jumbo loan rates have begun to level off, and some lenders offer lower rates.

Understanding the factors influencing mortgage rates and exploring your options will help you secure the best rate for your situation.

What makes a mortgage rate attractive? Mortgage rates change daily and have been steadily rising this year, though they remain relatively low compared to historical standards. According to data from Freddie Mac, the average interest rate for a 30-year fixed loan in May 2022 was 5.23%. In contrast, rates in the late 70s and 80s were much higher, often in double digits. To determine if you’re getting a fair rate on a mortgage, it’s advisable to compare offerings from different lenders. Platforms like Nerdwallet and Bankrate provide resources to compare rates, fees, and benefits.

It’s important to note that predicting future rate fluctuations is difficult, but refinancing for a lower interest rate is a possibility. However, refinance rates can sometimes be higher, especially for cash-out refinancing against a property’s equity to fund a new acquisition.

How do mortgage rates affect real estate investments? Increasing mortgage rates, while potentially stressful for borrowers, generally indicate a strong economy. As the economy strengthens, interest rates increase as a measure against inflation. When borrowing becomes more expensive, there is less money in circulation, theoretically curbing rapid price increases.

For investors, this situation has implications. While loans may be more expensive, it also leads to higher rental costs as fewer people can afford to buy homes. This could potentially increase short-term rental income for investors.

Rising mortgage rates can shift the market from favoring sellers to buyers. As single-family home prices have risen over the past two years, current homeowners are less likely to sell when financing options become more expensive. At the same time, buyers tend to focus on more affordable homes as additional interest costs impact their budget. However, the lack of supply generally maintains prices instead of causing a decrease.

Mortgage rates significantly affect housing affordability and the ability of new buyers to enter the market, which in turn influences rental prices. Higher interest rates mean higher monthly payments and more spending over the life of the loan. Mortgage calculators can help determine the impact of interest rates on your monthly payment.

Typically, higher mortgage rates coincide with inflation, leading to an increase in property values. While future predictions are uncertain, higher mortgage rates have generally been associated with property value appreciation over time, according to the Urban Institute’s analysis of Freddie Mac’s decades’ worth of data.

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Please note, the views expressed in this document are for general information only and should not be considered as specific advice or recommendations for any individual or investment product. These views are subject to change without prior notice. Refer to Foothold’s disclaimers for more information.

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