Buying a home can be intimidating, and rising interest rates certainly don’t help. While purchasing a home is still a solid investment in your family’s future, you just need to educate yourself on what these mortgage hikes mean for you.
The Home Buying Industry
It might be surprising to learn that a strong economy can lead to climbing interest rates. Americans, in theory, are set to be making higher wages and paying less in taxes for the foreseeable future. That means that they’ll also have more money to spend on things like mortgage payments.
However, many people become wary of purchasing homes when mortgage rates are high. It’s important to remember, though, that the cost of renting a home will likely rise year after year, unlike a fixed-rate mortgage.
While rates are a bit higher than they have been, they’re actually right about where they should be based on the economy. Since the housing collapse of the 2000s happened, the Feds have kept interest rates low and provided relatively easy access to credit.
Before the housing collapse, mortgage rates of 5-7% were the norm, so the market is correcting itself after a long period of downtime.
What it Means for Homebuyers
To put it simply, with a higher rate your monthly mortgage payment and the total amount you end up paying for your home are higher than they would be at a lower rate.
The Federal Reserve sets mortgage rates the way they do to keep prices stable. While you may be paying a bit more per month, the value of your home should increase comparably so when it comes time to sell, you’ll likely make more money than you would have otherwise.
Rising interest rates may be most difficult on young homebuyers, who often struggle to save up a full down payment. Millennials are more likely to go over their budget than any other generation, with about 40% of them paying an average of $25,000 more than they planned.
Fears of rates continuing to rise have some prospective homebuyers scrambling to find a home sooner than later. This can lead to competition and increased home prices in the short term due to supply and demand. If rates do continue to rise for the long term, home sales will likely decline.
What You Can Do About It
Once you have a grasp on what these mortgage hikes mean for you, you should take a look at ways you can combat rising interest rates:
- Paying a higher down payment to lower your monthly payment
- Buying a home you can reasonably afford
- Shopping around for the lowest mortgage rates
- Buying points to reduce your interest rate
- Getting pre-approved by a lender who is thorough
Rising interest rates can also affect homeowners with existing mortgages. If you have an adjustable rate loan, your payment will likely increase along with your rate. Amy Jaecks, a Connexus Mortgage Loan Officer, recommends “checking with your lender to ensure your payment will remain affordable. If not, look at options to refinance and lock in a fixed-rate loan where your payment can stay within your budget.”
Advice From the Connexus Mortgage Team
We asked two of our Mortgage Loan Officers, Katie Robinson and Amy Jaecks, to answer some questions future homebuyers might have:
What challenges can homebuyers expect to see with the recent rate hike?
With the rate hikes, home affordability has decreased. When the interest rates are low, the payments are slightly less. Therefore, you can afford a more expensive home still in your price range. As rates increase, the home you can afford will decrease.
Another challenge is the pre-approval. If you were pre-approved before the rate hike at, say 3.875%, and now the going rate is more than 0.5% higher, that could result in you not being able to afford the amount you were pre-approved for. It would cause you to have to decrease the price range you’re searching for.
What is one piece of advice you would give someone looking to buy a home?
Make sure you get pre-approved with a lender who takes the time to review your information and ensure everything is correct. That way there won’t be any surprises or potential denials before closing. At Connexus, the only reason you would be denied prior to closing would be for something out of your control. We verify all income, assets, down payment sources, etc., before issuing pre-approval letters.
Make sure you have funds for a down payment. On top of that you will need to pay for closing costs. Your closing costs are dependent on your state, county, and the title company used for your purchase. There are many mortgage calculators out there to give you an idea of what your payment would be.
Are the any positives for existing homeowners?
Our rates are still low enough that many can save by refinancing. There are homeowners out there with rates over 5%. With rates as they are right now, we can refinance them into a loan that may be a better fit for them with a lower payment.
If you purchased a home in the last 10 years, your rate is most likely quite low. This gives today’s homeowners the capacity to set aside more funds for a rainy day.
Recent mortgage hikes are nothing to be afraid of, as long as you know what you are doing and what these rates mean to you. If not, do your homework or work with a professional whose job it is to help you save money while finding the right home for your family. Get more information on Connexus Mortgage Loans.