Are homeowners who held onto a 3% mortgage rate becoming accidental landlords?
In fact, some of them are becoming “accidental landlords,” simply because they don't want to lose their low rates of the past. That being said, the so-called lock-in effect is putting pressure on both sides of the market.
More than three-quarters of homeowners — 78.7 percent — have a mortgage rate below 5 percent, while nearly 6 in 10 — 59.4 percent — have a mortgage below 4 percent. Just 22.6 percent have a mortgage rate below 3 percent, according to Redfin.
As a general rule, investment property mortgage rates will typically be at least 0.50% to 0.75% higher than primary mortgage rates. Lenders consider investment properties to be riskier than owner-occupied homes, given that borrowers are more likely to default on investment property loans.
Persistently higher interest rates continue to create headwinds for the U.S. housing market. 2023 was the slowest year for existing home sales since 1995. New home sales rose, however, reflecting the fact that housing demand remains strong.
Increased Demand in the Rental Market Amidst Higher Rates
As a result, they choose to rent instead, causing a surge in demand for rental units. This increased demand empowers landlords to elevate their rental rates, ultimately leading to amplified monthly income and overall cash flow for the property investor.
"Everyone locked in a 3% mortgage except millennials. Millennials spend significantly more on housing, while boomers spend more on health care and entertainment." Millennials experienced a 20% jump in mortgage debt since the end of 2021, according to BofA.
While there is an understanding that mortgage rates reaching pandemic-era levels of 2 percent to 3 percent is "highly unlikely," there is consensus that rates are poised to decline. But just how much of a decline is up for debate, according to Sahm.
Being a landlord, you're likely to be impacted by the interest rate hike. You need to know that, with a higher interest rate, you can make more money from your rental units. However, this also means that it will be more expensive to borrow money for other investments in your property portfolio.
Compared to high-interest loans, mortgage interest on a rental property loan is fully tax deductible. For some investors in upper income brackets, the tax benefit of writing off the interest expense to reduce taxable income may be more important than paying off a rental property loan.
As a rental property owner, you can claim deductions to offset rental income and lower taxes. Broadly, you can deduct qualified rental expenses (e.g., mortgage interest, property taxes, interest, and utilities), operating expenses, and repair costs.
Will 2024 be a good time to buy a house?
Mortgage rates are expected to come down in 2024, and inventory and home sales are likely to increase. Homebuyers and sellers can also expect prices to continue to rise, albeit at a slower clip than the past couple of years.
Lower prices: With fewer buyers who can afford the purchase, home sellers will likely no longer see multiple offers or bidding wars for their properties. This can lead to lower home prices. Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy.
A recession will hit in 2024, according to Paul Dietrich, chief investment strategist of B. Riley. Even a mild recession could spark as much as a 40% stock crash, Dietrich told Business Insider. That's because the market is looking the most overvalued since the dot-com craze of 2001, he said.
Rental Properties are Long-Term Investments
But here's the thing: real estate typically appreciates over time, making it a stable asset in the long run. Even if the value of your property takes a minor hit due to higher interest rates, the long-term potential for growth usually outweighs these short-term fluctuations.
Therefore, investing in rental properties during rising interest rates can be profitable. Purchase rental properties at a lower price due to reduced demand for buying homes and rent them out to tenants at a higher rate. This can result in higher rental income and potentially higher property value over time.
When inflation is running high, the Fed raises those short-term rates to slow the economy and reduce pressure on prices. But higher interest rates make it more expensive for banks to borrow, so they raise their rates on consumer loans, including mortgages, to compensate.
The road to homeownership is not always easy. Here's another challenge: Once you reach a certain age, it can be harder to secure a mortgage. Especially when you hit 70. That's according to new research from the Center for Retirement Research at Boston College.
Millennials typically finance around 90% of a home's purchase price, according to NAR's 2023 Home Buyers and Sellers Generational Trends Report. Fortunately for Millennials, a 20% down payment is no longer necessary. Thanks to private mortgage insurance, down payments can be as low as 3% in some cases.
“Today's first-time buyers are due to pay off their mortgage at 65-years old on average, compared to 53 in 1990 as sky-high house prices force buyers to extend their mortgage term to make their payments more affordable. “Rising mortgage terms mean more of us will still have housing costs in retirement in the future.
The 30-year fixed mortgage rate is expected to fall to the low-6% range through the end of 2024, dipping into high-5% territory by early 2025. Here's where mortgage interest rates are headed for the rest of the year and how that will impact the housing market as a whole.
Will mortgage ever go down to 3?
The bottom line
Sure, mortgage rates could fall to 3% at some point, but chances are that's not going to happen anytime soon. Moreover, waiting for rates to drop before you buy your home could backfire. Instead, consider buying your house now and refinancing your mortgage when rates improve.
Fannie Mae, the Mortgage Bankers Association and National Association of Realtors predict that mortgage rates will gradually descend in 2024, to around 6% in the final three months of the year.
Although you're not taking out a loan, higher interest rates can also affect the money factor (sometimes called rent charges) added to the depreciation as part of your monthly lease payments.
These actions resulted in historically low mortgage rates until early 2022, when the Fed began tightening its balance sheet and raising rates to combat inflation. What's the Highest Mortgage Rate in History? From 1971 to present, the highest average mortgage rate ever recorded was 18.63% in October 1981.
| Here Are The Average Apartment Loan Rates | |
|---|---|
| Private Banking Rates: 5.87% - 10.50% | Insurance Rates : 5.38% - 7.89% |
| CMBS Rates : 5.88% - 7.49% | Bridge Rates : 6.50% - 14.50% |
| Fannie Mae DUS Rates : 4.98% - 5.79% | FHA Rates : 5.37% - 6.22% |
