Mortgage rates have dropped, but still well above 5%

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According to Freddie Mac, the 30-year fixed rate mortgage rose to 5.25% in the week ending May 19, from 5.30% the week before. Compared to this time last year, 3% is well above the average.

“Economic uncertainty is causing volatility in mortgage rates,” said Sam Khater, chief economist at Freddie Mac. “As a result, purchasing demand is declining and home builder sentiment has dropped to a low in nearly two years. Builders are also dealing with rising costs, which means this stance will continue.”

As a result of rising rates, the cost of financing a home has increased significantly since last year for buyers.

In May 2021, a buyer who financed 80% of the purchase price with a $300,000 30-year fixed-rate mortgage had an average interest rate of 3%, and Freddie Mac.

Today, a homeowner with the same loan and an average interest rate of 5.25% will pay $1,660 per month in principal and interest. That’s $393 each month, or $4,716 a year, and $141,480 more over the life of the loan, according to Freddie Mac’s figures.

For many people, that additional $400 per month is the difference between buying a home and building equity and continuing to rent.

Mortgage rates are likely to stay or rise at these levels as long as the Federal Reserve tries to contain inflation. Federal Reserve Chairman Jerome Powell said the central bank will continue to raise interest rates until the target of healthy prices is met.

Mortgage rates tend to follow 10-year U.S. Treasuries, but they are also indirectly affected by the Fed’s actions on inflation. Yields on 10-year Treasuries rose and fell this week as investors seek stability amid a string of tough economic data.

“The Federal Reserve’s monetary tightening has the intended effect of cooling housing demand and allowing the market to start normalizing,” said Hannah Jones, economic data analyst at Realtor.com.

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This can already be seen in the housing market, although prices continue to rise. Redfin reported that it saw fewer bidding wars and more homes for sale compared to this time last year.

Jones said that while both developments are welcome news for prospective buyers, rising home prices are driving many home seekers away from the market.

He said those determined to find a new home will have the best success if they make a large down payment to reduce the amount they owe or look further away from their target area to find a more affordable home. .

“However, for buyers who can’t cope with higher prices and rising mortgage rates, still high inflation and rental prices provide little relief,” Jones said.