Inflation sees mortgages soar

Although fixed-rate mortgages have long been the preferred financing option for homebuyers, some mortgage lenders have seen adjustable rate mortgages grow in popularity as interest rates tick upward.

Mortgage rates have more than doubled in the past year, according to Brad Brookhart, assistant vice president, branch manager and loan officers at The Peoples Bank Co. in Celina.

Prior to this year, Brookhart said fixed rate mortgages had been around 3%. Now, they've jumped to 7% or higher.

According to the National Association of Realtors, the median mortgage payment for a Mercer County home was $841 in the first quarter of 2022, a $213 increase from the median payment of $628 a year ago.

"It's no surprise that there's been quite a bit of inflation over the past few years, and the demand for housing has exceeded supply so it's a seller's market," he said. "Housing prices have been up and interest rates have been low until the past year."

Brookhart said 30-year fixed rate mortgages have been the most popular financing option for homebuyers for years.

Fixed rate mortgages lock in interest rates, meaning the mortgage interest rate does not change over the duration of the loan.

Meanwhile, adjustable rate mortgages have a fixed interest rate for a period of between three to seven years, Brookhart said. He said he often sees a five-year fixed rate period over the course of a 30-year term.

Once the fixed rate period ends, the mortgage interest rate can fluctuate. Rates typically change once per year, and the amount rates can change are capped, Brookhart said.

"For the most part, interest rates can change one a year and it has caps to how much it can change each year," he said. "People bank on rates eventually coming down and saving money."

Brookhart said up until last year, the cost of homes had been up while interest rates had been low. However, a lot can change in a year, he said.

"In a low interest rate market, I'd say eight to nine out of 10 homebuyers choose a fixed rate. The only reason not to is if (the homebuyer) or the house don't qualify," he said. "But now, we're seeing around seven to eight out of 10 customers go for adjustable rate mortgages and only two to three go for the fixed rate."

Although interest rates are always in flux, Brookhart said the bank has seen interest rates for 30-year fixed rate mortgages around 7% or higher, more than double the roughly 3% interest rate the bank saw last year.

At the same time, bank officials have seen interest rates for adjustable rate mortgages between 1-2% lower than fixed rate mortgages, he said.

For example, the median home value in Mercer County is just shy of $200,000, according to the National Association of Realtors.

That 1% difference in interest could save a homebuyer $2,000 per year, although Brookhart noted that amount would change over the years as homebuyers make payments toward their loan.

"This (adjustable rate mortgages) is a little more popular because you're saving money now," he said.

Adjustable rate mortgages have a few other advantages aside from lower interest rates, he said.

Closing costs are often lower for adjustable rate mortgages than fixed rate mortgages, according to Brookhart. There are also no pre-payment penalties, meaning homebuyers can make larger payments toward their loan without penalties.

In addition, qualifying homebuyers can also seek to refinance their adjustable rate mortgage into a fixed rate mortgage when interest rates eventually decrease, he said.

According to a mortgage financial forecast published Oct. 23 by the Mortgage Bankers Association, interest rates for 30-year fixed rate mortgages are anticipated to slowly decline beginning in the second quarter of 2023.

However, Brookhart encouraged potential homebuyers to make considerations before gunning for an adjustable rate mortgage.

"Consider how long you'd live in the house, whether you'd refinance," he said. "It's definitely worth taking a look at."