Mortgage rates are now well above 5% on a 30 year fixed rate mortgage. Rates have hit record highs in recent months, after the record lows they hit during the pandemic. Seeing rates above 5% may be shocking given that the average 30-year fixed rate mortgage rate has fallen below 3% in 2021.
Unfortunately, it is likely that the rates have not yet peaked. Inflation continues to rise and the Federal Reserve is expected to raise interest rates several times in 2022. Although mortgage rates are not directly linked to the Federal Reserve, they are affected by the central bank’s decision on the federal funds rate since that is the rate at which banks can lend money to each other overnight.
Mortgage rates are likely to rise as the Federal Reserve takes steps to fight inflation. With that in mind, here’s what homebuyers need to know about what rising rates mean for them.
Higher rates mean your loan will be more expensive
The biggest impact of rising rates is that your loan will be more expensive. The monthly mortgage payment is based on the cost of principal and interest. If interest rates go up, payments go up, and so do total financing costs.
If you want to play around with the numbers to see what you could afford – and experiment with different interest rates – check out our mortgage calculator for more information.
For example, when rates go up 3% to 5%, borrowers will pay about $100 more each month for every $100,000 of mortgage debt. It can make a huge difference to your budget and the total cost of your loan over time.
It may be harder to qualify for a higher rate mortgage
Mortgage lenders consider your income against all your debts, including your mortgage. If your debt-to-income ratio (DTI) is too high (above about 36%), it’s harder to get approved for a loan.
When your mortgage payment increases due to higher interest rates, it negatively affects your DTI and loan approval becomes more difficult.
Delaying until rates drop may not be the best choice
With mortgage rates so much higher today than just a few months ago, you might be tempted to wait to buy a home until interest costs come down. The problem is that there’s no guarantee this will happen anytime soon and, as mentioned above, the reverse is likely to happen.
If you try to wait for rates to go down, you might find that they go up instead, making it even harder and more expensive to buy a home. And even if rates eventually drop, you might have missed months and years of property appreciation and equity building.
Also, if rates drop after buying a home, you may be able to refinance to lower your future mortgage payments. But if rates go up, you can’t go back in time and get a loan at today’s rates.
MRAs may look attractive right now, but could backfire
Some homebuyers may be tempted by an adjustable rate mortgage (ARM) right now because the starting rate for an ARM is likely to be lower than what you would be charged for a fixed rate mortgage. But MRAs carry unnecessary additional risks. Since your rate is only locked in for the first few years, you could see your interest rate and total costs go up.
Rather than going for a riskier loan, it’s often a good idea to try to buy a home you can afford at today’s rates and make sure to shop around among mortgage lenders to get the best possible offer on a fixed rate loan. Hopefully this will maximize the likelihood that the buying decision will be the right one in the long run since you can start building equity.
The key is to make sure your loan is affordable even at today’s high rates – and that you’re financially ready to buy a home before moving forward.
The Best Mortgage Lender in Ascent in 2022
Mortgage rates are rising – and fast. But they are still relatively low by historical standards. So if you want to take advantage of rates before they get too high, you’ll want to find a lender who can help you get the best rate possible.
This is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, without a credit check, and lock in your rate at any time. Another plus? They do not charge origination or lender fees (which can reach 2% of the loan amount for some lenders).
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