Home prices and interest rates are rising across the country, making the decision to purchase a home an even more difficult decision than before. You may have heard that federal interest rates are rising, but aren’t sure how to understand how much it will impact mortgages.
Although interest rates are higher than they have recently been, that alone isn’t the only factor you should consider when deciding if now is the right time for you to buy. Taking into account your monthly income and current housing demand, alongside a myriad of other factors will help you make a more fully-informed decision. Read on to learn more about what’s happening to interest rates right now and how to consider that as one of many factors in your decision whether or not to buy a home.
Why Are Interest Rates Rising?
Interest rates change for several reasons but are generally tied to the Federal Funds Rate and also the 10-year Treasury rate, which is the interest rate at which banks borrow money. However, other factors also impact the interest rate you receive, such as the current economic climate and even your personal credit.
Currently, the Federal Reserve is raising interest rates to combat inflation. Unfortunately, there is no indication that inflation is going down, nor how long interest rates will keep rising. You can expect the Federal Reserve to continue increasing interest rates until inflation is under control, and even then, they will likely stay elevated to ensure inflation stays low.
Overall economic health also plays a part in interest rates but not the way you may think. In a struggling economy, mortgages are still considered a safe investment, and investors are likely to move their money from stocks to mortgage securities and bonds. This will have an effect on rates and will cause them to decrease. Because the economy has done well in recent years, most of this money has been moved back into the stock market, adding to higher interest rates.
Lastly, you must look at your credit. It may surprise you just how much of an effect it can have on your interest rate. Check your FICO score regularly and try to get it as high as possible before purchasing a home. A big mistake that some home buyers make is taking out a loan or getting a credit card right before or while they are in the process of buying a home. Do not make this mistake, as it can have costly consequences.
Will Rates Keep Going Up?
Economists believe that interest rates will continue to rise due to continued increasing inflation. Trying to accurately predict interest rate rise/fall is an imprecise science for sure. So many factors play into what interest rates are that there is no guarantee whether they will go up, down or stay the same. However, you can speculate what they will do based on current economic situations, and it certainly doesn’t take an economist to do so. Inflation is still on the rise, and it will keep taking interest rates up with it.
Home prices are also still very high and are arguably a larger concern than high-interest rates. It is important to consider both the high price of homes alongside higher interest rates when making a decision. If you find a great deal on a house you love, it may make sense to spring for it, knowing that you can always refinance later on. So long as you can afford the monthly payment, making a decision based on the cost of the home rather than the interest rate may make sense for you.
How to Combat Higher Rates?
If you are currently in the market for a home or are thinking about buying a home, there are a few things that you can do to combat these higher interest rates and get the best mortgage rate possible. If you are already working with a lender, be sure to ask them about your available options, such as VA, FHA and USDA loans.
If you can afford a higher down payment, this can help lower your interest rate or at least lower your monthly mortgage payments. An obvious way to do so is by purchasing a less expensive house (not always the easiest thing to do in today’s housing market).
Consider saving up until you can make a down payment of at least 20%. At this percent, you will be able to get rid of private mortgage insurance, and it should also help you get a slightly better interest rate. Keep in mind that even a fraction of a percent will add up significantly over the course of a loan.
If you cannot come up with more upfront, you can also consider shortening the term of your mortgage. A common choice is to go from a thirty-year mortgage to a fifteen-year one. However, you do not have to stick to these lengths and can instead opt for something in between.
While going with a shorter mortgage can provide significant savings on interest, you should only do this if you are certain you will be able to afford it.
Should I Wait to Buy a House?
Now, you are probably wondering whether you should buy now or wait for things to improve. This will vary depending on your unique situation, but it is unlikely that mortgage rates will decline in the short term.
Because of uncertainty with both mortgage rates and home prices, you will need to determine whether you are willing to wait it out or buy something now. Keep in mind that if home prices continue to rise, they could have a greater impact on your monthly payment than the higher interest rates that are currently available. Combine that with higher interest rates, and you have a recipe for disaster.
In order to wait out lower interest rates, you should be prepared to forego buying a home for a few years. This may be a deal-breaker to some. Interest rates do not look like they will fall in the near future, but neither do home prices. There is no one size fits all answer, and you will need to determine what makes the most sense for you. As a rule of thumb, your mortgage payment should be less than 25% of your income. If you are considering buying a home you can use an amortization schedule to calculate your monthly payments and determine how higher interest rates will affect how much you will pay.