In the heat of August, prices can plummet

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Forecast mortgage rates in August

Mortgage rates will not change much in August, but they are more likely to decline than rise. I wouldn’t be surprised if the average rate at 30-year fixed rates drops to 2.75% per annum at some point in August. The monthly average should be between 2.8% and 2.9%.

IN COVID-19 pandemic still a long way off, and this is the reason for my prediction that mortgage rates may drop slightly in August. The rise in hospitalizations and deaths (here and elsewhere) is hampering the global economy. In turbulent times, investors seek refuge in safe bonds, including mortgage-backed securities. Mortgage rates fall when investors compete to buy mortgage-backed securities.

If I am wrong and mortgage rates rise in August, it will be because investors are confident in economic growth internationally. Bonus points if investors, experts and policymakers are more worried about inflation because mortgage rates are sensitive to inflation.

What happened in July

Mortgage rates didn’t change much in July, as I predicted. I said the monthly average for a 30-year fixed income would be between 2.8% and 3% per annum, and we ended the month with an average of 2.86%, slightly below the June average of 2.9%.

Prices Affected by many forcessome of them work in opposite directions. When prices rise rapidly, higher inflation tends to push up mortgage rates. When the economy shrinks or grows more slowly than expected, the collapsing economy tends to lower mortgage rates.

In July, the downward pull was slightly stronger than the upward pull. Inflation was relatively high, but the spread of the delta variant of the coronavirus unnerved investors, whose demand for mortgage-backed securities drove rates down.

Higher house prices prevail over lower rates

Availability has plummeted this summer. Mortgage rates are low, but house prices are growing at a record pace. It’s enough to dissuade many potential home buyers

Let’s take a look at what happens to the monthly payments when interest rates fall and house prices skyrocket. In our example, we will compare average mortgage rates and median home prices in June 2020 versus June 2021 (latest available data). We assume that the buyer will receive FHA insured loan and makes an initial payment of 3.5%.

In June 2020, the median home price was $ 294,400 and the median fixed 30-year mortgage rate was 3.33%.

In June 2021, the median home price was $ 363,300 and the median rate was 2.9%. In one year, home prices rose dramatically and mortgage rates fell significantly.

In this scenario, the monthly payment for principal, interest and mortgage insurance was around $ 1,450 in June 2020 and around $ 1708 in June 2021. And that $ 258 monthly payment increase isn’t the only thing that has gotten more expensive. As the price of the home increased, so did both the down payment and the FHA down payment of 1.75% of the loan amount.

When you add up the down payment, mortgage insurance down payment, and monthly payments, a loan in June 2020 would cost about $ 32,678 in the first year, and a loan in June 2021 would cost about $ 39,343. Total spending in the first year rose by nearly $ 6,700, although the mortgage interest rate fell.

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Holden Lewis writes for NerdWallet. Email: hlewis@nerdwallet.com. Twitter: @HoldenL.

The article “Mortgage Lending Forecast: Rates May Drop Sharply in the August Heat” first appeared on NerdWallet.

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