Exploring the Current State of Mortgage Interest Rates
Let’s dive into the current landscape of mortgages, focusing on interest rates. This will help us grasp the possible effects of rising interest rates on the housing market and consumers.
Recent Trends and the Majority of Homeowners
Since November 2018, many homeowners have refinanced, cashing in on lower rates. I’ve been harping on about this refinancing opportunity since 2009.
Interestingly, over 90% of American mortgages have an interest rate under 5%. So, if you’re anxious about the housing market collapsing due to high mortgage rates, you can breathe easy.
Many homeowners aren’t bothered by the upward trend in mortgage interest rates since their monthly payments stay the same.
Additionally, those with mortgage rates above 5% aren’t likely concerned unless they’re in financial trouble. If they were, they would’ve refinanced to a lower rate already!
A Peek into Adjustable-Rate Mortgages (ARMs)
Only about 5% of homeowners have an adjustable-rate mortgage, although this percentage is creeping up to 10%. If you hold an ARM, you might be feeling uneasy. But, odds are, by the time your introductory fixed rate ends, the mortgage rates will probably dip again.
Breakdown of Mortgages by Interest Rate
Here’s a fascinating chart by Black Knight and Axios Visuals showing the distribution of mortgages by interest rate. You’ll notice most are below 4%.
Understanding Mortgages: A Closer Look
Let’s analyze the 53.585 million mortgages in this chart:
- Below 2%: 0.53%
- 2% – 2.5%: 8.8%
- 2.5% – 3%: 24.5%
- 3% – 3.5%: 21.1%
- 3.5% – 4%: 17.7%
- 4% – 4.5%: 11%
- 4.5% – 5%: 6.7%
- 5% – 5.5%: 2.8%
- 5.5% – 6%: 2%
- 6% – 6.5%: 1.9%
- 6.5% and above: 2.9%
Remarkably, around 40% of Americans own their homes outright, having tapped into the threefold benefits of early mortgage payoff.
Spotlight on Mortgage Percentages
Only 9.6% of mortgage holders have a rate above 5%. And the 63.3% that fall between 2.5% and 4% represent the “sweet spot” where most Americans find themselves.
I must say, I’m awed by the 0.53% of mortgage holders with a rate under 2%. I’m part of the 8.8% group that holds a rate between 2% and 2.5%.
I don’t regret taking out my adjustable-rate mortgage, even in this rising environment. I’m confident that by the time my ARM resets in 2027, rates will be more favorable.
The Future of Homeownership in Rising Rates
With the recent uptick in mortgage rates, we can expect the average homeownership tenure to keep growing. The value of owning a home has surged, especially with the rise in remote work, the importance of real estate in wealth creation, and the pursuit of passive income.
Snapshot of U.S. Homeownership Tenure
According to different sources, the average U.S. homeownership tenure ranges from about eight to 13.2 years. This number varies by city, from a low of 6.9 years in Atlanta to a high of 14 years in cities like Los Angeles, San Francisco, and San Diego.
What Higher Tenure Means for the Market
If mortgage rates stay elevated, you might find more homeowners staying put, leading to a decrease in supply and an increase in home prices.
As one chart from Altos Research shows, single-family home inventory is notably low. With rates on the rise, the expected increase in inventory may not materialize, keeping prices strong.
Homeownership Affordability and the Current Scenario
Most homeowners find their current homes affordable, and only those who are financially secure or need to move will likely do so in this high-interest-rate climate.
Investing in Real Estate: Opportunities and Platforms
The blend of rising rents and capital values is a potent wealth-builder. Platforms like Fundrise allow investors to tap into real estate markets across the country, offering opportunities to diversify and benefit from emerging trends.