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Potential homebuyers who’ve been looking forward to the spring selling season may be watching with trepidation as interest rates on mortgages tick higher.
As of Thursday, the average rate for a 30-year fixed-rate mortgage with a conforming loan balance — that is, $832,750 or less — was 6.35%, according to Mortgage News Daily. About two weeks earlier, ahead of the U.S. and Israel launching military strikes against Iran, it was 5.99%.
“High oil prices are not good for mortgage rates,” said Lawrence Yun, chief economist for the National Association of Realtors.
However, a year ago, the average rate was higher: 6.82%. And it was about 8% in October 2023. There are also other indications that affordability has improved, albeit slowly.
Nevertheless, for buyers concerned that oil-driven rates could fall after they’ve committed to a purchase and picked a mortgage lender, there may be ways to mitigate that, experts say.
‘Oil drives inflation, and inflation drives rates’
The jump in mortgage rates over the last two weeks is largely attributed to the specter of inflation, which appeared due to sudden constraints on the world’s oil flow after the war broke out. With part of the oil supply not getting through the Strait of Hormuz, a key maritime channel in the Persian Gulf, prices spiked — and with them, inflation fears.
Brent crude, a global oil price benchmark, traded as high as $119.50 per barrel on Monday, up from about $70 before the U.S.-Israeli military strikes. It was trading around $100 per barrel as of Friday morning.
“The Iran conflict — that’s a major headwind” for mortgage rates, said Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker based near Philadelphia. “We don’t know how it’s going to shake out. Oil drives inflation, and inflation drives rates.”
In simple terms, when investors anticipate higher inflation, they want more return for long-term investments, and so the yield on long-term bonds rises — which influences mortgage rates. As of Friday morning, the 10-year treasury’s yield was about 4.25%, up from below 4% before conflict broke out in the Middle East.
Before that, “I had been forecasting 6% [for spring] and it staying near that for the remainder of the year,” Yun said. “But oil prices have messed that up.”
Now, he anticipates rates to be around 6.5% if the conflict in the Middle East is prolonged or oil prices remain high.
Possible alternatives to ‘locking in’ an interest rate
For buyers, the uncertainty means it’s important to understand how rates can change as you go through the buying process.
Generally speaking, when you get preapproved by a lender to borrow a certain amount. Ideally, once you sign a purchase agreement for a particular house, you can “lock in” the interest rate that is offered. That means you are guaranteed that particular rate for a set period — usually 30 or 60 days — assuming nothing about your financial situation changes in a material way before you finalize your purchase within that timeframe.
Locking in the rate comes with the key benefit of knowing that if rates go higher before you close on the house, you will still get the agreed-upon rate.
On the other hand, if rates drop, you still would pay the rate you agreed to.
However, there may be options to avoid that outcome.
“Consumers should ask [their lender or broker], ‘If I lock now, and rates get better, what are my options?'” Rinaldi said. “In such a volatile market, it’s beneficial to the consumer to know.”
Some lenders may offer a “float down” provision, which gives the buyer the right to an improved terms if rates drop by a set amount before the purchase is completed at settlement.
Alternatively, sometimes you can let the rate “float” — meaning you are not locked in until closer to when you close on the home. The risk there is that if rates rise, you miss out on the better rate you could have locked in. The benefit is that if rates drop, you can take advantage of the lower rate.
Be aware that lenders may charge more for these rate-float options.
Market conditions have improved from a year ago
Additionally, with affordability slowly improving, buyers who didn’t qualify for a loan a year ago may be in a better position now with lower rates. Home prices aren’t jumping up as they had been.
“Housing affordability is dependent on mortgage rates but also home prices,” Yun said. “In some places in the country, there is a slight decline in prices.”
He said overall, the market “is so much better for buyers this spring compared to last spring.”
“We are seeing more inventory, so buyers have more choices,” Yun said. “And homes are staying on the market longer, so buyers have more buying power than a year ago.”
The median price for a single-family home in February was $401,800. Based on that amount and a 6.12% mortgage rate, the average in February, buyers would need an income of $93,696 to qualify for a mortgage, according to the NAR’s affordability index. The measurement assumes the buyer has a 20% down payment, which in this case would be $80,360.
That qualifying income amount is lower than a year earlier, when the average rate was 6.92%, and the median single-family home price was $400,900. At that point, buyers needed $101,616 in income to qualify, NAR’s affordability index shows.
Of course, lenders consider more than just income when determining whether to approve a loan, including factors such as credit score, credit history and outstanding debt.
