Mortgage rates surpassed 5%. Is it still a good time to apply for a loan?

The recent jump in mortgage rates makes the rates look high. Historically, this level of interest is not unusual. Before 2011, the rates were at or above 5% in 2011, and had a brief climb again in 2018. Since the beginning of this year, the rate for a 30-year fixed home loan went up from 3.22 percent to 5.25 percent as of May 19, according to data provided by Freddie Mac. 

Interest rates dropped to one of their lowest levels in the summer of 2020 due to the pandemic and remained relatively flat for the next 16 months. The 30-year-fixed-rate mortgage averaged 3.03 percent in July of 2020, the lowest rate since 1971, and the 15-year home loan declined to 2.51 percent. 

But the below 3 percent borrowing rate is an exception rather than a general rule. At the beginning of the century, interest rates for a 30-year loan surpassed 8.5 percent and remained above 4 percent for most of the time. 

Even more useful would be to compare the borrowing rates with inflation, which is at 8.3 percent in April, the highest it has been in 40 years, Next Advisor reports. Considering the inflation, the borrowing rates are low, below the inflation rate, so in the current environment, a borrower would be making money by borrowing at any rate below the inflation rate. 

What would be the best way to think about borrowing: if the inflation declines and the interest rate decline, any buyer will be able to refinance. If the inflation is not cured by the raised rate and is mostly driven by the supply chain issues, it is likely to continue, to rates will continue to be high or go higher. In that scenario, borrowing at current rates is beneficial. So, borrowing and investing in real estate seems to be a reasonable step in hedging against inflation.

Resources:

“Mortgage rates just turned ‘negative’ when adjusted for inflation—and that could keep powering the housing market boom,” by Shawn Tully (Fortune, 2022)

“Historical Mortgage Rates: Averages and Trends,” by Jason Stauffer (Time, 2022)

“Here Are Today’s Mortgage Rates, May 16, 2022 | Rates Below 5.4% After Big Drop,” by Jason Stauffer (Time, 2022)

“Current Mortgage Rates, May 23, 2022 | Rates Are Stable,” by Jason Stauffer (Time, 2022)

“Consumer Prices Are Still Climbing Rapidly,” by Jeanna Smialek (The New York Times, 2022)

“Inflation May Fall Slower Than Expected,” by Chuck Jones (Forbes, 2022)