Rising Oil Prices Push Mortgage Rates Higher—What Homebuyers Can Do
Mortgage rates continued their upward trend Thursday, reaching 6.35% for a 30-year fixed-rate mortgage, according to Mortgage News Daily, a rise that is causing concern among potential homebuyers as the spring buying season begins.
The increase, from 5.99% approximately two weeks prior, is largely attributed to rising oil prices and the resulting fears of increased inflation following recent geopolitical tensions. Brent crude oil traded as high as $119.50 per barrel on Monday, a significant jump from around $70 before the recent military actions, and was trading around $100 per barrel as of Friday morning.
Lawrence Yun, chief economist for the National Association of Realtors, stated, “High oil prices are not good for mortgage rates.” While current rates are lower than the 6.82% average from a year ago and the 8% seen in October 2023, the recent climb is creating uncertainty for prospective buyers.
The jump in rates is driven by investor expectations of inflation. When investors anticipate higher inflation, they demand greater returns on long-term investments like bonds, which in turn pushes up mortgage rates. As of Friday morning, the yield on the 10-year Treasury was approximately 4.25%, up from below 4% before the recent conflict in the Middle East.
Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker, explained, “The Iran conflict — that’s a major headwind for mortgage rates. We don’t know how it’s going to shake out. Oil drives inflation, and inflation drives rates.”
For buyers concerned about potential rate increases, experts suggest exploring options beyond simply “locking in” a rate. Locking in a rate guarantees a specific rate for a set period, typically 30 or 60 days, but prevents benefiting from potential rate decreases. Some lenders offer a “float down” provision, allowing buyers to secure a lower rate if rates fall before closing. Alternatively, buyers can choose to let the rate “float” closer to the closing date, risking a higher rate but potentially benefiting from a decrease. However, lenders may charge additional fees for these options.
Despite the rising rates, affordability is showing some signs of improvement. Home prices are not increasing as rapidly as they were previously, and inventory is increasing, giving buyers more choices and potentially more negotiating power. Yun noted that the market is “so much better for buyers this spring compared to last spring,” with homes staying on the market longer.
In February, the median price for a single-family home was $401,800. Based on this price and an average mortgage rate of 6.12% in February, buyers would have needed an income of $93,696 to qualify for a mortgage, assuming a 20% down payment of $80,360, according to the National Association of Realtors’ affordability index. This is lower than the $101,616 income required a year earlier when the average rate was 6.92% and the median home price was $400,900.
However, lenders consider factors beyond income, including credit score, credit history, and outstanding debt, when evaluating loan applications.