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Guide to Rising Mortgage Rates for Buyers, Sellers and Downsizers

The end of cheap loans is complicating matters for first-time owners to retirees

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If you’re thinking about buying or selling a home, you may notice that the tenor of the housing market is changing. With mortgage rates now above 7 percent, the prospect of high monthly payments has pushed some buyers out of the market entirely. And homeowners who already have low-rate mortgages, many under 4 percent, are reluctant to move and give them up.

What does all this mean for older homeowners? If you have paid off your mortgage and are happy where you’re living, you don’t have to pay much attention to mortgage rates — or the housing market, for that matter. If you’ve decided to relocate for retirement or move for a job — meaning you have to sell your old home and buy a new home, or borrow against the equity built up in your existing home — you might find that your options are becoming increasingly limited. And expensive. Here’s your guide to the new world of high mortgage rates.

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Why are mortgage rates so high?

Mortgage rates take their cue from the 10-year Treasury note yield, which stood at 4.3 percent as of Sept. 6. Treasury yields have been rising because of inflation. Treasury notes are loans to the U.S. government. They pay a fixed interest rate until they mature, at which point you get your principal back. When investors think that inflation will rise, they demand a higher interest rate from bonds, because inflation erodes the value of the note’s interest payments over time.

Bankers feel the same way about home mortgage rates, and when inflation is rising, mortgage rates rise too. Although mortgage rates are nowhere close to their high of 18.63 percent in 1981, the recent increase in mortgage payments makes a big difference for buyers and sellers. From May 2019 to March 2022, for example, you could get a 30-year fixed-rate mortgage for $300,000 for less than 4 percent. Your monthly principal and interest payment on a 4 percent loan for $300,000 would be $1,432.

The average 30-year mortgage rate on Aug. 31 was 7.18 percent, according to mortgage giant Freddie Mac. At that rate, your monthly payment would rise $600, to $ 2,032 — an increase that many potential buyers might not be able to afford. “If you want to move out of that house and purchase another home, maybe a better home, you’re going to be facing a mortgage yield now that is about 7 percent,” says economist John Lonski, president of the Lonski Group.

Advice for homebuyers

One of the peculiarities of the current housing market is that new homes are often selling for the same — or less — than existing homes. Normally, new homes cost more than existing homes. Because interest rates have risen so much, many homeowners are reluctant to put their homes on the market and lose their rock-bottom mortgage rates, making the inventory of existing homes historically low.

“In the month of July, existing home sales are down 16.7 percent from a year ago,” Lonski says. Sales of new homes, however, rose 31 percent. “I’ve never seen anything quite like this.”

Buying a new home may make more sense for people who are downsizing or moving somewhere else with lower home prices. New homes typically have warranties — in addition to new appliances, furnaces and roofs. With a new home, you won’t have to worry about major repairs, at least for a few years. “All else being the same, I would go with that new home,” Lonski says.

And some builders are offering innovative financing to take some of the sting out of mortgage rates. “They have cut prices, and they do mortgage buy-downs,” says economist Bill McBride. In a typical buy-down, for example, the builders temporarily reduce the mortgage rate to 4 percent for the first year, then 5 percent the next year, and 6 percent for the third year. After that, the rate jumps to the market rate, around 7 percent, for the duration of the loan. “The pitch is always, ‘Oh, I bet you the interest rates are going to fall so you’ll be able to refi,’ ” McBride says.

Buyers can also pay “points,” essentially an upfront fee, directly to a lender in exchange for a slightly lower mortgage rate. The investment in points can pay off over time if you hold the original mortgage for several years. Paying points to lower a mortgage rate is less attractive if you plan to sell or refinance quickly.

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Don’t cry for the builders. They don’t have to compete with dirt-cheap existing homes, as they did in the Great Recession of 2007 to 2009. “The guys I’ve talked to, they’re doing fine,” McBride says. Costs for materials have fallen after spiking early in the pandemic. Lumber, for example, is down about 43 percent from its high in May 2021. Builders also make a good profit from their design centers as well as upgrades, he adds.

Tips for sellers

“We have the largest generation in history in their prime buying years right now,” says McBride of millennials, which have surpassed boomers as the largest generational cohort. “They’re getting married, having kids and buying homes.” That’s good news.

Another bit of good news: Inventory is low, meaning that if you’re living in a highly desirable neighborhood, you may be the only house for sale in town. Low inventory gives sellers more control in pricing. “What’s happening is that people have opted for a new home wholly because they cannot find an existing home,” Lonski says.

The bad news is that millennials are buying later in life than boomers did. The average age of a first-time home buyer is 36, the oldest on record. And, given that the median home price in the U.S. (half higher, half lower) is $412,300, millennials tend to be fussier as first-time buyers than boomers were. They don’t want to take on the added cost of a new roof or a major kitchen remodel alongside a big mortgage payment. 

In some red-hot real estate markets, sellers are still getting multiple bids and bidding wars. But that’s slowing down, and in some markets, sellers are having to cut prices to compensate for dated appliances or bathrooms that haven’t been updated since the Eisenhower administration. If you want to get a quick sale, be flexible on price or be willing to give concessions for outdated appliances or decor.

Also consider making modest improvements that pay off at resale, such as fresh paint, upgraded flooring or exterior updates. Just aim to pay for the improvements with cash on hand, if you can, instead of borrowing against the equity in your home. Otherwise you’ll get hit with high rates on a cash-out refinance or home equity loan, which have gone up alongside traditional mortgage rates.

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Options for downsizers

If you’ve paid off your mortgage and want to move to a smaller home, you could do very well for yourself, McBride says. A big part of that is tax law. Single homeowners can shield up to $250,000 in capital gains when they sell their home; it’s $500,000 for couples. “This is going to be easy for seniors,” McBride says. If you move from, say, a four-bedroom home to a condo, you may well be able to buy your new home outright, without a mortgage, and pocket the leftover cash.

If you’re planning to move from a less expensive area to a more expensive one — say, San Diego — then you may have to accept a much smaller home than the one you have, or take out a mortgage of 7 percent or more.

Alternatively, you might look at adjustable-rate mortgages, or ARMs. These loans start with an introductory rate that’s typically lower than 30-year fixed rates. Currently, for example, you can get an ARM that adjusts after seven years for 6.79 percent — not a huge savings, but if you think rates will be lower in seven years, it might be a good bet for some. (You can also get ARMs that reset in three, five or even 10 years.)

“One of my friends in the era of the 3 percent mortgages took out a 1.75 percent [ARM],” McBride says.  “It’s 1.75 for seven years. She’s got five more years on it, and we were just laughing about it the other day.” Should her ARM adjust upward, she can handle a higher payment — an absolute necessity if you decide to take out an ARM. Buyers, including retirees on fixed incomes, should think twice about ARMs if they don’t have the surplus cash set aside to cover higher payments when the rate adjusts. 

Date the mortgage, marry the house?

Real estate agents are currently advising buyers to “date the mortgage and marry the property,” meaning that if you hold your nose and accept a high mortgage rate now, you can eventually refinance to a lower rate.

McBride, however, isn’t so sure that mortgage rates will tumble in a few years. The average mortgage rate since 1971 has been 7.74 percent, a period that includes extremely high rates in the 1970s and extremely low rates from 2008 to 2021. So today’s mortgage rates are slightly below the historical average.

And bear in mind that interest rates fell below 4 percent because the nation was going through one of the worst financial crises since the Great Depression. For rates to return to that level, you’d have to be expecting a similarly rotten economic environment. “We’re not going back to 3 percent [mortgage rates] without another crisis,” McBride says. “And we're probably not even going to see under 5 percent.”

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