Understanding Mortgage Rates: Navigating the World of Home Financing

Understanding Mortgage Rates: Navigating the World of Home Financing

In the Florida real estate market, all eyes are on mortgage rates. As of Feb. 23, 2024, mortgage rates are now over 7% again, which, in turn, limits the demand for new loans.

Many homebuyers and sellers are choosing to stay on the sidelines instead of moving. This comes as no surprise given the proportion of Americans with a low interest rate. More than 82% of homeowners have a mortgage rate of less than 5%.

Read on to learn how mortgage rates are affecting real estate investments. Explore rate expectations in both the long and short run.

Are Mortgage Rates High?

Historically speaking, mortgage rates are not high. In fact, rates were much higher in the late 1970s into the mid-2000s. Today's mortgage rates would be considered favorable over this period.

In the late 2000s, the housing bust behind the Great Recession changed everything. To inject capital into the economy, the U.S. Federal Reserve started a program called quantitative easing. They lowered their rates to near zero to encourage borrowing.

This started an era of low mortgage rates that the majority of U.S. homeowners enjoy today. After the Covid-19 pandemic, many Americans refinanced to a mortgage rate below 3%.

You should not allow the misconception of high rates to stop your investment plans. While rates may come down some, the era of sub-3% mortgages is likely over.

What Is Next for Rates?

For a brief period, the average 30-year mortgage rate was back in the 6% range. Homeowners reacted quickly, and mortgage demand temporarily rallied. Now that rates are back above 7%, mortgage demand is cooling.

There is a direct correlation between mortgage rates and real estate demand. Economists do expect the U.S. Federal Reserve to start lowering rates in the second half of 2024. They foresee several consecutive rate cuts once inflation is under control.

Naturally, this will help lower mortgage rates and spur more real estate activity. How low mortgage rates will go remains to be seen. However, the conventional wisdom is that mortgage rates will return to the 5-6% range once the Fed completes its rate-cut cycle.

How Do Mortgage Rates Affect Real Estate Investment?

Some investors rely on home financing to buy a home. They take out a mortgage or home equity line of credit (HELOC) to generate the capital needed for a downpayment or finance the remainder of the home price.

With higher rates, cash is king in the real estate market. You can reduce the cost impact of high interest rates by putting more cash down.

This is easier said than done for some investors. A growing number of investors are looking for alternate ways to generate capital.

Some are taking loans from their retirement plan because they can secure a lower rate. Many are choosing to liquidate other assets to create cash.

Your Guide to Real Estate Investments

This is not an easy market to navigate. Housing inventory is low and prices are still rising. Rates are higher than they have been for a few decades now, causing additional pressure.

PMI Best Assets has the experience and knowledge to navigate a challenging real estate market. If you need help with your real estate investments, contact us at PMI Best Assets to speak with an expert.