Interest Rates and Home Affordability
Worried that rising rates could derail your home buying goals? Don’t. There are a variety of ways to limit the damage and stay on track.
One of the factors driving the health of the housing market over the last few years of economic recovery has been consistently low interest rates. Currently hovering around 4.5% for a 30-year fixed rate mortgage, home borrowing and refinancing is incredibly affordable. And compared to historical rates, it almost feels as if mortgage companies are giving away free money.
This chart from Fannie Mae shows how interest rates have fallen precipitously over the last 30 years, making borrowing far more affordable. Coupled with low down payment loan products like the FHA mortgage, today’s lower interest rates allow buyers to purchase more home while paying less over the life of the mortgage.
Economic Recovery drives mortgage rate rise
While financial writers bemoan a rise in interest rates over the last few months, rates are still far below their historical average of 8%. Because the economy is doing so well — a rising stock market and very low unemployment — the artificially low mortgage interest of recent years is no longer needed to juice the housing market. That could set the stage for rising interest rates over the next few months or years.
While current rates are expected to hold steady for the immediate future, uncertainty remains due to the possibility of inflation, the naming of a new Federal Reserve Chair, and other factors. So if you’re not quite ready to buy, how can you keep a rise in interest rates from spoiling your plans?
Ways to offset a mortgage rate increase
1. Choose a 15-year fixed rate mortgage.
While most people automatically think in terms of a 30-year mortgage, there are a lot of reasons to love a 15-year term. In today’s more mobile economy, people just don’t buy a home at 28 and then stay there for the rest of their lives. By choosing a 15-year mortgage, you can build equity faster so that you can move anywhere your ambition and talent take you without losing money on your home sale.
In terms of interest rates, the 15-year mortgage is often a full ½% below the more popular 30-year fixed. Add to that the fact that you’re only paying interest for 15 years instead of 30, and this option ends up saving you tens of thousands of dollars over the life of the loan.
2. Increase your down payment.
If possible, adding more to your down payment can save you thousands over the life of your loan for a couple of reasons. That bump in the down payment means you’re financing less up front and saving the interest on that money over the life of the loan. In addition, low down payment loans may require Private Mortgage Insurance (PMI) until the loan reaches 20% equity. That can take several years at a cost of hundreds of dollars each month. A higher down payment can keep you from having to spend that money, and may make up for a slightly higher interest rate.
3. Shop around.
Although we talk about the “current interest rate” as if it is one particular number, it’s really an average of the available range of interest rates. That means that different lenders may have different rates on offer. In addition, different products have different rates, even if their terms are otherwise the same. If the interest rate on a 30-year conventional is up, the rate on a 30-year FHA may be lower.
In addition, different lenders have access to different loan products, special offers, and even grants that make your down payment or loan terms more affordable. A great program that helps with the down payment or closing costs may be more than enough to offset a slight interest rate change.
4. Don’t panic.
While we often worry about a rise in interest rates and how it will affect the total cost of the loan over time, on a month-to-month basis it may only cause a change in your payment of a few dollars each month. While, yes, that does add up over time, it may not account for much in your monthly budget. And who knows? If interest rates go lower down the road, you may be in a position to refinance and recapture some of that money on the backend of your mortgage.
Need to discuss your budget and loan options with a lender? I know some great ones and can help you with all of the information you need to make an informed decision. Let’s talk about your options and create a home search that works for you. Contact me today and let’s get started!