Mortgage rates hover near 4%

After a startling jump that pushed 30-year home loans closer to 4% last week, mortgage rates slipped this week, likely due to U.S. Treasuries being pulled down by the Russia-Ukraine conflict.

The rate on the average 30-year fixed home mortgage dropped to 3.89%, down from 3.92% a week ago, according to Freddie Mac. A year ago, 30-year loans averaged 2.97%. Mortgage rates have jumped roughly 84 basis points since December, driving mortgage applications down as rattled homeowners and first-time buyers digest rising rates.

“Even with this week’s decline, mortgage rates have increased more than a full percentage over the last six months,” said Sam Khater, Freddie Mac’s chief economist. “Overall economic growth remains strong, but rising inflation is already impacting consumer sentiment, which has declined in recent months. As we enter the spring homebuying season with higher mortgage rates and continued low inventory, we expect home price growth to remain firm before cooling off later this year.”

Realtor.com Chief Economist Danielle Hale told Yahoo Money she expects “further rate increases.”

‘First-time buyers stuck between a rock and a hard place’

Rock-bottom supply levels, rising interest rates and increased homebuying from investors are just some of the hurdles entry-level buyers are contending with. Now, many have to deal with the latest bogeyman — rising rent.

Rent prices jumped a record 14% last year, according to Redfin data. As of January, the year-over-year rent-price increases have outpaced mortgage payments in 26 of the 50 largest metro areas, according to a Realtor.com analysis.

“Even though home prices and mortgage rates are rising, we’re seeing rental costs rising as well,” said Hale. “A lot of first time homebuyers are stuck between a rock and a hard place and looking at higher housing costs no matter which way they turn.”

The sharp increase in rent prices will inevitably force some entry-level buyers to drop out of the homeownership, as saving for a downpayment is one of the biggest hurdles for buyers, according to Hale.

Based on a Realtor.com analysis, purchasing a starter home can be more affordable than renting but when you crunch the numbers it may not be as cheap as it seems. A 4% rate for a 30-year fixed mortgage for a home priced at $375,000 would increase monthly mortgage payments by $220 from December 2020. That would total an additional $79,200 on the life of the 30-year loan for buyers who put a 20% downpayment on a home. Likewise, if a buyer made a 10% down payment at a 4% mortgage rate, monthly payments would be $248 more, totaling $89,280 across the life of a 30-year loan.

The increases could be tough for entry-level buyers.

“Anytime mortgage rates rise it means higher borrowing costs for homebuyers and so for some buyers that are on the fence and are already struggling to navigate among higher mortgage prices, higher rates might mean they have to push the pause button on their home search,” said Hale. “I do expect it’s going to be a headwind for homebuyer demand.”

Purchase applications for the week ending Feb. 18 plunged to their lowest level since December 2019. Mortgage applications fell for the third straight week to 13.1% on a seasonally adjusted basis from one week earlier, according to data from the Mortgage Bankers Association (MBA).

Refinance demand to go down, but cash-outs will see some activity

Though mortgage rates pulled away from 4% this week, mortgage refinances tumbled to 2019 levels. The refinance share of mortgage activity decreased 50.1% of total applications, from 52.8% the previous week, according to the MBA.

“Higher mortgage rates have quickly shut off refinances, with activity down in six of the first seven weeks of 2022. Conventional refinances in particular saw a 17% decrease last week,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Last week, the population of high-quality refinance candidates who could shave three-quarters of a point from their mortgage dropped to 3.8 million, down from 5.1 million a week earlier, according to mortgage analytics firm Black Knight.

According to Hale, while rising rates have closed the window of opportunity for most homeowners looking to refinance, those interested in cash-out refinancing won't be as affected. A cash-out refi replaces an existing mortgage loan with a new loan for a larger amount, allowing homeowners to then receive the difference in cash.

“For folks that are looking to tap equity in their home, even if rates are higher, doing a cash out refi may make sense. Being able to tap that equity for different home improvements, paying down debt or other investments will keep cash-outs active,” said Hale. “I expect overall refi demand to go down, but we will still see some refi activity on the cash-out side of things.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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