What you need to know about today’s mortgage interest rates

Understanding Mortgage Interest Rates

Mortgage interest rates are a fundamental aspect of borrowing money for real estate, but they’re often misunderstood. When you take out a mortgage, you don’t just repay the principal amount you borrow—you also pay interest, which is the cost of borrowing that money. The rate of interest you’re charged depends on several factors, including the type of loan, its size, and your financial profile.

For international investors, it’s essential to recognize that your mortgage rate will likely be 0.25 - 1 percentage points higher than what a U.S. resident might secure. This is primarily due to the perceived risk that lenders associate with foreign nationals investing in U.S. property. However, understanding these rates—and the factors influencing them—can help you make more informed decisions.

What Impacts Your Mortgage Rate?

Several factors impact the mortgage rate you’ll be offered as an international investor:

• Credit Profile and Financial Stability: Lenders assess your creditworthiness, often through your credit score, debt-to-income ratio, and financial history. For international investors, this can be more challenging, as accessing credit data across borders isn’t always straightforward. At Milo, we do not use your credit history or income to determine your creditworthiness for cross-border mortgages, but evaluate the income-earning potential of your property, and your ability to cover the downpayment and closing costs.

• Loan-to-Value Ratio (LTV): The size of your down payment versus the loan amount affects your interest rate. A higher down payment generally means a lower rate, as it reduces the lender’s risk.

• Market Conditions and the Federal Reserve: The Federal Reserve’s actions influence mortgage rates through the broader financial market. When the Fed raises the federal funds rate, it increases borrowing costs for banks, which can lead to higher mortgage rates. Mortgage rates are also tied to the 10-year Treasury yield, which responds to investor expectations about the Fed’s future rate decisions. If the Fed signals more rate hikes, Treasury yields—and mortgage rates—often rise. Conversely, when the Fed hints at rate cuts or engages in bond-buying programs, mortgage rates may decrease as borrowing becomes cheaper.

• Risk Premium for Foreign Nationals: Lenders often charge international buyers a premium due to the added complexities and risks involved in cross-border lending. This typically results in rates that are 0.25% to 1.00% higher than those offered to domestic borrowers.

Current Trends in Mortgage Rates and the Housing Market

Mortgage rates have been fluctuating, but recent trends show a gradual decline. As of now, the average 30-year fixed rate in the U.S. hovers around 6.5% for primary homes, a noticeable drop from the peaks of the past year. Experts like Barbara Corcoran of Shark Tank emphasize that while rates are lower than before, they’re still significantly higher than the pandemic-era lows.

However, Corcoran also warns that waiting for rates to drop further could be a mistake. As she points out, “the minute interest rates go down…people will come rushing back into the market. Prices are going to explode, and you’re going to be paying more for the same house.”

The current housing market reflects this sentiment. Although rates have eased slightly, home prices remain resilient, especially in competitive markets. The demand for housing is still high, and as mortgage rates inch down, more buyers are likely to enter the market, potentially driving prices up even further.

What Should Investors Consider?

For international investors, the key takeaway is this: waiting for rates to drop may not yield the benefits you expect. The current market conditions suggest that any significant decrease in rates could lead to a surge in demand, pushing home prices higher and potentially offsetting any savings from a lower interest rate.

Instead of waiting, consider locking in a mortgage rate now. Even if rates fall in the future, you always have the option to refinance. The primary risk of waiting is that prices may increase faster than rates decrease, making properties less affordable overall.

Barbara Corcoran’s experience with high-rate environments reinforces this strategy. She notes that, historically, higher mortgage rates haven’t deterred long-term investors from succeeding in the U.S. real estate market. In fact, by securing a property now, you can position yourself ahead of the inevitable market rush once rates do start to decline.

In Summary

U.S. mortgage rates are complex and influenced by many factors, including Federal Reserve policies, inflation, and investor sentiment. For international investors, the stakes are higher due to premium rates and market volatility. However, the current environment still presents opportunities.

By understanding how mortgage rates work and recognizing the potential risks of waiting, you can make a more informed decision. The U.S. real estate market continues to offer strong long-term investment potential, and entering the market now may be the smartest move to ensure you’re not paying a premium later.

While the allure of lower rates in the future may be tempting, the benefits of securing an investment today could far outweigh the costs of waiting.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.