While mortgage rates fluctuate daily, 2018 has seen interest rates rising above the historic lows of recent years. Most experts anticipate rates will climb to just below 5 percent by the end of the year. If you’re in the market for a new home today, you may be concerned about whether rising rates could affect your housing budget. Conversely, if you’re a seller, you may wonder if that could reduce your pool of buyers.
While higher mortgage rates affect affordability, two other trends are having a bigger impact on the housing market this year—inventory and wage growth. Low inventory has kept most markets skewed toward sellers. While that’s good news for homeowners thinking about listing their properties, it’s an extra challenge for buyers. Rising wages, though, have helped increase would-be buyers’ confidence in their ability to become homeowners. Higher incomes also mean that borrowers’ debt-to-income ratios are lower, which is better for their financial health and makes it easier to qualify for a mortgage.
Home sellers: How higher mortgage rates may affect you
The inventory of homes for sale has been consistently lower than demand for several years now, which means buyers are likely to compete for your home if it is in good condition and appropriately priced. Careful pricing is essential in any market since homes that are overpriced are unlikely to sell quickly and eventually sell for less than their market value if priced right initially.
In a rising rate environment, you need to be aware of the sales price of comparable homes, since a higher mortgage rate will increase monthly payments for buyers. If you’re selling in a price range that appeals to first-time buyers, that pool of buyers could be even more sensitive to higher interest rates. Your Realtor can help you evaluate current market conditions when you’re ready to sell.
Would-be buyers: What you need to know about higher mortgage rates
As interest rates rise, the difference in your monthly payment becomes more significant at higher price points. For example, the monthly payment on a 30-year fixed-rate mortgage for $400,000 at 4.0 percent interest is about $1,910 for principal and interest. At 5.0 percent, that same loan will cost $2,147 per month and will require $85,545 more in interest over the life of the loan.
If you need to borrow $800,000, your monthly payments jump from $3,819 at 4.0 percent to $4,295 at 5.0 percent and you’ll pay $171,090 more in interest overall.
As a buyer, there are several strategies you can employ to reduce the impact of higher mortgage rates, including:
Prepare your finances for the lowest possible rates as soon as possible. A credit score of at least 740 is required to get the lowest rates on a conventional loan, since lenders use risk-based pricing. Lower credit scores incrementally increase your rate. Paying down debt, fixing errors on your credit report and paying all your bills on time can raise your score. While it could take months to improve your score, raising it even a few points could help reduce your mortgage rate.
Make a larger down payment. A down payment of at least 20 percent helps your housing budget in two ways. First, the interest rate you pay is lower when your loan-to-value is lower. Second, a down payment of 20 percent or more eliminates the need to pay private mortgage insurance, potentially saving you hundreds of dollars each month.
Consider paying discount points. A discount point, equal to one percent of your loan amount, can be paid to lower your interest rate. Your lender can help you weigh the benefit of spending extra cash upfront to reduce your interest rate and monthly payments for the length of your loan term.
Consider an adjustable rate mortgage. While it may seem counter-intuitive to choose an adjustable rate mortgage (ARM) when rates are rising, you can opt for an ARM with a fixed rate for five, seven or 10 years. The initial rate is lower than mortgage rates for fixed-rate loans and, if you plan to move before the initial period is up, you can save on interest. Make sure you understand the full ramifications if you stay longer than anticipated and your loan resets before you sell.
Lock in your mortgage rate as soon as possible. As soon as you have identified the property you want to buy, it’s best to lock in the rate to avoid further rate hikes. Your mortgage rate can be locked for 30, 45, 60 days or even longer for a fee. Some mortgage lenders, like Prosperity Home Mortgage, LLC, even offer programs that allow you to lock in a rate before finding a home.
Be ready to make an offer quickly. A loan pre-approval, cash in the bank for your deposit and down payment, and a solid understanding of your needs and wants are essential in a tight housing market. When mortgage rates are rising, it’s even more important to be ready to make a fast decision when you find the right house.
If you’ve made the decision to buy your first home, downsize or move up to a new home, Long & Foster can help. Get started today at LongandFoster.com.