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Interest rates on home loans are rising again, giving headaches for home buyers

Potential home buyers walk past an "Open House" sign displayed in the front yard of a property for sale in Columbus, Ohio.

Ty Wright | Bloomberg | Getty Images

The average interest rate on the popular 30-year fixed mortgage hit 3.7% Tuesday morning, according to Mortgage News Daily. It is the highest since the beginning of April 2020 and now 83 basis points higher than at the same time a year ago.

Interest rates are responding to rising bond yields as the financial markets respond to faster and more aggressive monetary policy tightening by the Federal Reserve. Mortgage rates loosely follow the interest rate on the 10-year US government bond, but they are also affected by the demand for mortgage bonds. The Fed had aggressively bought these bonds during the pandemic to keep interest rates low, but it is now pulling out of the MBS market faster than expected.

Mortgage rates "would be higher, but lenders are compressing their margins to compete in a rising interest rate environment. Some will be at 3.625%, but many are already up at 3.75%," said Matthew Graham, COO of Mortgage News Daily.

Lenders are losing huge amounts of refinancing business, which had boomed just a year ago when interest rates were much lower. Applications for refinancing a home loan fell by 50% compared to a year ago, according to the latest weekly survey from the Danish Mortgage Credit Association.

"While the rapid rise in interest rates motivates a certain proportion of hedge funders - especially those looking for refinancing payments, rates are now becoming a major deterrent," Graham said. "In other words, the refi share in the original market should get a significant hit in upcoming updates."

Mortgage rates set more than a dozen record low levels in 2020, causing the already strong demand for home buyers to rise even more. With the extra purchasing power that low prices provide, buyers are bidding on the low supply of homes for sale, and these prices are now still up in double digits from a year ago.

Both new and existing housing prices are at a record high, and there is still not enough supply to cool the market.

Rising prices are not what potential buyers want to see at the forefront of the normally busy spring housing market. Buyers of new construction are also concerned as the timelines from contract to closure are long now due to supply chain and labor issues. These buyers cannot lock the prices until they have a fixed end date.

Buyers of the existing house at a median price (around $ 350,000) are now looking at monthly payments of around $ 125 more than they would have been just a few months ago. It can price some out of the market, especially first-time buyers at the lower end.

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