As mortgage rates rise, would-be home buyers may have the feeling that a door is being slammed in their face. However, even with today's mortgage rates up a percent or so from earlier this year, prospective buyers may find it easier than they thought to open the door to a new home.
Low mortgage rates are not dead
Recent years have seen the lowest mortgage rates on record, but even now that they've jumped from a little below 3.5 percent to a little above 4.5 percent, low mortgage rates are not dead. Anyone with a memory of the mortgage market that stretches back further than the last few years will realize that today's mortgage rates are still extremely low.
According to data from the Federal Reserve, August's average mortgage rate of 4.46 percent was more than four full percentage points below the historical average 30-year mortgage rate of 8.59 percent. Indeed, in over forty years of history, mortgage rates have been lower than the August rate less than 6 percent of the time.
Silver linings for home buyers
The historical perspective is that while a little higher than earlier in the year, mortgage rates are still well below normal. Meanwhile, a more forward-looking view suggests that the recent rise in rates might make it easier for home buyers to get a mortgage.
When mortgage rates dropped sharply in recent years, refinancing activity soared. In early May of this year, when mortgage rates were at their lowest, refinancing represented 75 percent of all mortgage application activity, according to a survey by the Mortgage Bankers Association. By early September, with 30-year rates over a percent higher, refinancing had dropped to 61 percent of all applications.
Mortgage lenders have limited capacity, and the more refinancing activity there is, the fewer resources they can devote to making new purchase loans. As refinancing activity slackens with rising rates, it could potentially free up some capacity for purchase loans.
In addition, higher mortgage rates simply create more of an incentive for banks to make loans. The only drawback of the recent rate environment has been that underwriting standards have been extraordinarily tight. With rates rising but still not particularly high, would-be homeowners may find they can still get an affordable rate and find the approval process a little easier.