How to deal with the end of ultra-cheap mortgages

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How to deal with the end of ultra-cheap mortgages

Home buyers and sellers have enjoyed historically low mortgage rates for years, but the party may be ending. Though they have stalled over the past few months, mortgage rates have trended up since hitting bottom in 2016, and all evidence points to more expensive mortgages for the foreseeable future.

Buyers and sellers will have to change their expectations and their budgets in response.

What buyers can do about higher rates

The most important thing any borrower can do to lower their rates, whether buying a home, car or college education, is improve their credit, said Paul Bishop, vice president of research for the National Association of Realtors. The economy will swing up or down beyond your control, but if you have a good credit score, you'll qualify for a lower interest rate than someone with a bad credit score. Want to improve your score? Read our crib sheet on fixing your credit.

Otherwise, buyers may have to look at homes in a lower price range, Bishop said. A higher interest rate means bigger monthly mortgage payments. Estimate how different rates could impact your budget using a mortgage calculator like the one on realtor.com.

"For those potential buyers out there, it's always a good idea to keep a close eye on rates and evaluate how a change in rates might affect the ability to purchase a home you're looking at," Bishop said.

What sellers can do

Sellers enjoying high home prices might not care about higher mortgage rates. But once they sell, they'll likely become buyers themselves in a market with higher rates than they paid before, said Aaron Terrazas, senior economist for Zillow.

"Sellers may want to consider whether they want to become a buyer in a market with higher home prices and mortgage rates, or stay in their home and make renovations so it meets their needs," Terrazas said.

It's a sellers' market at the moment, but if mortgage rates rise significantly, it could affect prices, Bishop said.

Why rates are rising

The average 30-year fixed mortgage rate was 3.8% in September 2017. It's since climbed to 4.5%, according to the Primary Mortgage Market Survey from Freddie Mac. That's the highest it's been in years, but it's still not very high, Bishop said.

"Keep in mind we're coming from a very low level," he said.

Rates collapsed after the Great Recession and still have yet to approach the 2008 peak of 6.6%, let alone the inflation-driven rates of the 1980s, when interest was in the teens. Though the housing market looks to be slowing, it's still strong, with lots of buyers and not a lot of homes for sale, Bishop said. A 0.7% increase in interest rates won't scare off too many people.

For example, say you take out a $200,000 mortgage for 30 years. An interest rate increase of even 1% only changes your monthly payment by about $100. That's not nothing, but it's not necessarily enough to make you pick a different house.

What's behind the recent increase? Mortgage rates tend to follow interest rates for 10-year Treasury notes, which are set by the financial markets. When the economy is strong, as it is now, rates tend to rise, Bishop said.

When rates rise, home sales tend to fall. A 1% rise in mortgage rates — which hasn't happened yet — would lead to an expected 2% to 3% drop in home sales, Bishop said, though the strong economy could buttress the housing market in spite of a rise in rates.

It's not clear how long rates will keep rising, but potential home buyers should definitely prepare as if they will. They certainly shouldn't expect a decrease, Bishop said.

"No one is expecting a sharp spike in mortgage rates, but we're in the situation where the economy is humming along, it's very strong, so if anything, mortgage rates are going to continue to increase," he said.

Buying a home? Read our primer on mortgages first.

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