What Higher Mortgage Rates Mean For Homeowners and New Buyers
Mortgage rates are on the rise, along with home prices, due to inflation. What does that mean for new home buyers?
Prior to this year, we saw a period of sustained lower mortgage rates for new homebuyers. Unfortunately, with mortgage rates on the rise, new home buyers are facing more challenges and decisions when it comes to buying a home.
Here to help answer some questions for those looking to buy a new home, or refinance their current home, is our very own Jim Markus. Jim worked as a loan officer in the past and has some excellent advice and information for anyone looking to buy or refinance their home.
What Do Higher Mortgage Rates Mean for New Home Buyers?
As rates rise, homebuyers pay more for the same size mortgage than they would have when rates were lower. That means higher monthly payments and a higher overall amount paid back to the bank. The big-picture strategy from the Fed is: Raise rates to slow inflation. Home prices surged over the past few years. Higher rates should mean a slower growth rate for housing prices.
Will This Affect My Rate As A Current Homeowner?
If your mortgage has a fixed rate, higher market rates won't affect you unless you decide to refinance your property. If you have an ARM (an adjustable-rate mortgage), then the higher mortgage rates may affect you when the fixed period of your mortgage ends. For example, a common 3/1 ARM has a fixed rate for the first three years and then adjusts every year after. If you're not sure what kind of mortgage you have, take a look at your mortgage documents.
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How Will My Interest Rate Be Affected If I Have Poor Credit?
Less-than-stellar credit often means a less-than-stellar rate for your mortgage. That was true 20 years ago, and it's true today. As rates increase, those with bruised credit can expect to pay higher prices than those with pristine credit. If you are declined for a mortgage (or for any line of credit, due to your credit report), you're entitled to see a copy of your credit report. You can also take a look at your credit report for free once each year. That's a good idea, so you can catch any errors early—before you apply for a loan.
Should I Still Purchase a Home Right Now?
Absolutely! Higher rates mean higher monthly mortgage payments, but it can also mean less purchase price competition. Consider the big picture. If higher interest rates result in a cooler housing market, you might not have to out-bid as many buyers to get your preferred home.
How Do I Know Which Loan is Right For Me?
If you call a lender, they'll be delighted to tell you which loan is best for you. The issue? They aren't impartial advisors. They want your business as soon as possible (and as often as possible). So do your research! Before you talk to a lender, make a realistic budget. Consider how much you can afford for your home. Monthly costs include the mortgage's principal and interest, property taxes, and homeowners insurance. Determine a maximum home budget based on that information. Online mortgage calculators allow you to input a home's purchase price, down payment, anticipated interest rate, and loan length. You can use these to build your own strategy for a home purchase long before you speak to a mortgage broker, loan officer, or bank.
When you do speak to a lender, they will ask for some of your information before they provide a specific quote. That's normal. Mortgage quotes should take into account your income, assets, and credit history. If someone offers you a quote without this information, then the quote won't be worth much. Get quotes from two or three lenders. Then, compare like for like. Ask your lender for the following (and ideally get the answers in writing): How much will you pay each month? How much will you pay over the course of the loan? Is the rate fixed or adjustable? Do you have to pay points to qualify for this rate?
What Are Mortgage Points?
You might have heard of "paying points" to get a lower rate. Mortgage points, also called discount points or origination points, allow you to pay a little more up-front in order to qualify for a lower rate over the course of your loan. One "point" is 1% of your total loan amount. So, for a $300,000 loan, a point would be $3,000. For a $100,000 loan, a point is $1,000. Note that the more points you buy, the lower your mortgage rate could be. That means a lower monthly payment. These can be a very smart way to save on interest over the course of your loan if you don't plan to move for a long time. Do your own cost-benefit analysis to determine how long you'd have to pay on your mortgage to cover the up-front discount points.
When Should Homeowners Consider Refinancing?
It might seem like the worst time to refinance, but that's not always the case. Homeowners with equity in their homes might consider refinancing in a few circumstances. If you've significantly improved your credit since you bought your home, you might be able to qualify for a lower rate, even though rates have increased. You might also consider refinancing if you have an ARM and expect rates to continue rising.
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