November 02, 2023
Whether you own a home or not, or have a mortgage or not, the recent sharp rise in mortgage rates is full of important lessons that will help you build financial security.
Focus on what you have today, not what you think/guess/hope you will have tomorrow.
For more than 15 years, mortgage rates were abnormally low. From a 2006 high of 6.7%, the interest rate on a 30-year fixed-rate mortgage fell in the wake of the financial crisis and bumped between 3.5% to 4% for more than a decade.
That was such a long time for rates to be so low that it seemed “normal.” So many of you just presumed that if and when you needed a mortgage—or if and when you wanted to sell—mortgage rates would be a good deal for you or prospective buyers. But here we are: In the fall of 2023, the same 30-year fixed-rate mortgage is now near 8%. That makes it much costlier for anyone to buy a home.
Will rates come down? Maybe. Or not. None of us know how the economy will shake out in the coming months and years. The recent increase in mortgage rates is tied to the Federal Reserve raising its target interest rate over the past two years. Though the Fed Funds rate doesn’t directly impact mortgage rates (the 10-year Treasury note rate is what mortgage rates react to) this “tightening” policy has sent all interest rates higher. The Fed has signaled it may soon stop raising its core rate, but that does not mean interest rates will fall.
And even if they fall, there is no guarantee they will fall enough for us to see the interest on a 30-year mortgage go down to 4%, or lower. The long-term average for mortgage rates is around 6%. Not 8%, and not 4% or lower.
There are two lessons here:
When you have the opportunity to make a financial decision that is affordable and smart, do not wait for a “better” deal.
I know many of you nearing retirement have been planning on downsizing. But you decided to just wait a few more years. You just assumed the strong housing market would stay strong. But now the math has changed. You can still downsize, but you may find the market is not as advantageous as buyers who need a mortgage are squeezed by higher rates.
Don’t wait to get back to “break-even” or what was.
Just because mortgage rates were below 4% for more than a decade does not mean they will return to that level. I need to reiterate that rates got that low because, after the financial crisis, the Federal Reserve was so concerned about keeping the economy alive that it kept rates artificially low.
This lesson extends well beyond mortgages. Do you own a stock, fund, or ETF that has lost value, and you have come to realize it is not the right investment for you long-term, but you are just waiting for the price to get back to what you paid?
That is not smart.
What reason do you have to believe the stock/fund/ETF will get back to your price? Or how long will it take to get you to break even? If it ever gets to break even? The better move is to consider selling and reinvesting in something that is a better fit for you.
Again: when it comes to managing your financial life, my advice is to always focus on what you have, not what you had. Deal with today’s reality and I think you will build a more secure financial future.