During the pandemic, mortgage interest rates fell to some of the lowest levels ever recorded. This was a boon for homeowners as they could refinance their mortgages and lock in record-low rates. Homebuyers benefited as their buying power increased, and they could purchase properties they might otherwise not be able to afford.
Now, as inflation grips the economy, would-be homebuyers are facing climbing mortgage rates. While rising interest rates will decrease your buying power, there are moves you can make to limit the impact on your finances.
Before reviewing these steps, it’s essential to understand the financial implications of rising rates.
The Impact of Rising Mortgage Rates
You probably know that higher interest rates mean you’ll pay more for your mortgage. However, how much impact does this really have on buying a home?
To illustrate, imagine you are interested in buying a home that costs $300,000 and plan to use a 30-year, fixed-rate mortgage. The following example compares how two different interest rates will impact the principal and interest (P&I) portion of your monthly payments.
|Loan Term:||30-Year Fixed||30-Year Fixed|
|P&I Monthly Payment:||$1,264.81||$1,610.46|
During the pandemic, rates on 30-year, fixed-rate mortgages hovered around record-lows of 3%. In the first example, the P&I portion of your monthly mortgage payment would be $1,264.81.
As rates begin to rise, it will cost more to finance the same $300,000 home. If interest rates were at 5%, the P&I monthly payment would jump to $1,610.46.
In this example, the 5% interest rate increases your payment by $345.65. Due to higher rates, you would pay $345.65 extra each month for the same house. While this can be disheartening, there are ways to offset the additional cost of higher rates.
Tips to Make Your Money Go Further
- Lock in Rates Now
Mortgage rates fluctuate daily. If you’re preparing to buy a home, it’s wise to lock in today’s rates with a pre-approval from your lender. When you lock in rates, even if rates increase the next day, you should be guaranteed your locked rate. These locks typically last between 30 to 60 days (can vary by lender) so that you have time to look for your new home without worrying about changing rates. If rates decline during that time, most lenders will give you the lower interest rate when you complete your loan. It’s a win-win for the homebuyer.
- Buy Down Your Rate with Points
Many lenders will allow you to make interest payments upfront in the form of “points.” Buying and paying for points upfront will reduce your interest rates. Typically, a point is equal to 1% of your loan value and can reduce your interest payment by 0.25%.
For example, if buying the $300,000 home referenced above, one point would equal a $3,000 upfront payment. As a result, your 5% interest rate would decline to 4.75%. Be sure to work with a mortgage specialist to determine if this strategy is right for you.
- Choose the Right Mortgage
There are many different types of loans when it comes to buying a home. Working with a mortgage specialist will help you decide which solution will work best for your specific financial needs.
If you’re considering a fixed-rate mortgage, you might opt for a shorter loan term. Typically, this will result in higher monthly payments, but shorter terms usually have lower interest rates. Plus, you’ll pay the loan off quicker and significantly reduce how much interest you pay overall.
Or you might look into an Adjustable-Rate Mortgage (ARM). This type of variable-rate loan typically offers lower introductory rates with the option for your rate to increase over time. It’snot the right solution for everyone, but it could help if you believe rates will decline in the future.
- Consider a Larger Down Payment
Depending on your mortgage type, your required down payment could range from 3% to 20% of the home price. Suppose you can put more money toward the down payment. In that case, you will decrease the total amount you need to borrow – thus, reducing your monthly payment.
A larger down payment will also help you avoid Private Mortgage Insurance (PMI). Lenders typically require this protection when you have less than 20% equity in the home, and the cost is generally added to your monthly payment.
- Try to Offset Other Costs
If you’re looking at a larger house payment than you originally budgeted for due to rate increases, consider finding other ways to limit your housing costs. For example, you might avoid homes that carry higher homeowner association fees. Or, buying a smaller home can help reduce property taxes, insurance costs, and recurring utility and maintenance expenses.
Due to rising rates, it’s important to be more diligent with your finances, especially when buying a home. Keep your budget flexible in a rising rate environment, and always look for ways to make your money go further. Although higher rates mean you have to pay more in the long run, it’s also an opportunity to seek other ways to save.
We’re Here to Help!
To schedule a time to meet with a team member, please stop by any of our convenient branch locations or call (888) 777-9982. We look forward to helping you finance the home of your dreams.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.