Within the August warmth, charges might go for a dip
Mortgage rate forecast for August
Mortgage rates won’t change much in August, but they will go down rather than rise. I wouldn’t be surprised if the average 30-year fixed-term deposit rate drops to 2.75% APR sometime in August. The monthly average should be between 2.8% and 2.9%.
The COVID-19 pandemic is far from over and that’s why I forecast that mortgage rates could fall slightly in August. An increase in hospital admissions and deaths (here and in other countries) is weighing on the global economy. Investors seek refuge in safe bonds, including mortgage-backed securities, during turbulent times. Mortgage rates fall as investors compete to buy mortgage-backed securities.
If I’m wrong, and mortgage rates rise in August, it will be because investors around the world are confident about economic growth. Bonus points if investors, experts and politicians are more concerned about inflation – because mortgage rates are sensitive to inflation.
What happened in July
Mortgage rates didn’t move much in July, which I was predicting. I said the monthly average of the 30-year term would be between 2.8% and 3% APR, and we ended the month averaging 2.86%, slightly below the June average of 2.9%.
The rates are influenced by many forces, some of which are acting in opposite directions. When prices are rising rapidly, higher inflation tends to drive mortgage rates higher. When the economy shrinks or grows more slowly than expected, the stuttering economy tends to pull mortgage rates down.
In July, the downward pulling force was slightly stronger than the upward pushing force. Inflation was relatively high, but the spread of the delta variant of the coronavirus unsettled investors, whose demand for mortgage-backed securities drove interest rates down.
Higher home prices override lower prices
Affordability is suffering this summer. Mortgage rates are low, but house prices are rising at a record pace. It is enough to deter many potential homebuyers.
Let’s see what happens to the monthly payments when interest rates fall but home prices soar. In our example, we’re comparing June 2020 average mortgage rates and median home prices to June 2021 (the most recent data available). We assume the buyer is receiving an FHA insured loan and paying a 3.5% down payment.
In June 2020, the average home price was $ 294,400 and the average 30-year fixed-rate mortgage rate was 3.33%.
In June 2021, the average home price was $ 363,300 and the average rate was 2.9%. Within a year, home prices had risen sharply and mortgage rates had dropped significantly.
In this scenario, monthly payments for endowment, interest and mortgage insurance were approximately $ 1,450 in June 2020 and approximately $ 1,708 in June 2021. And that $ 258 increase in monthly payment wasn’t the only thing that got more expensive. As the home price increased, so did the FHA down payment and upfront payment of 1.75% of the loan amount.
If you add up the down payment, mortgage insurance prepayment, and monthly payments, the June 2020 loan was about $ 32,678 in the first year, while the June 2021 loan was about $ 39,343. The total cost for the first year increased nearly $ 6,700 even though the mortgage rate fell.
This article originally appeared in NerdWallet.