While no one knows what the future has in store, experts predict rising mortgage rates this year to help slow the pace of increased housing demand. Home prices in the first quarter of 2021 rose about 10 percent, ending the year with an increase of approximately 18 percent, according to real estate experts.
While slowing slightly, home price growth continues to accelerate—plus, flexible work options are shaping housing choices in new ways. Here’s how rising rates could affect your homebuying journey, and the strategies you can use to protect your purchase power.
How Are Rates Determined?
Mortgage rates are calculated as a percentage of the mortgage amount. In general, the longer you have to pay off your mortgage, the more interest you’ll pay over the life of the loan.
There are fixed-rate and adjustable-rate mortgage loans—with a fixed rate, your interest will remain the same throughout the entire course of your loan; with an adjustable rate, it may fluctuate after a certain amount of time, sending your monthly payment up or down with it.
Strategies to Deal with Rising Mortgage Rates
Make a Bigger Down Payment. For many buyers, a low-down payment option can put homeownership within reach. However, if increasing rates result in a monthly payment that’s higher than what you’d like to pay, a larger down payment could offset the impact.
If you go with a larger down payment, you will have more equity in your home from the start. It may also eliminate the need for Private Mortgage Insurance, which would decrease your monthly payments.
Pay Discount Points. You can also use discount points to buy down your mortgage rate. Typically, this option is beneficial for homebuyers planning to live in their space for a while. Be aware that discount points will increase your closing costs.
Lock Your Interest Rate. Locking your rate early in the transaction guarantees that it won’t rise during the loan process, which will give you a more relaxed timeline if you’re shopping for a home. With RateSafe, the rate we offer you will stay the same for 90 days; If rates decrease, there’s a one-time “float down” option.
Improve Your Credit Score. Regardless of your loan type, you will likely receive a better mortgage rate if you have a higher credit score. So, how can you improve it?
Review your credit report to see if you have any outstanding balances. Federal law gives you the right to one free credit report per year from each of the three reporting agencies. If possible, you should also pay any outstanding balances, and be sure to make your payments on time every month moving forward. It’s a good idea to become familiar with the five factors involved in calculating your score.
Refinance. If you’re worried about rates going up, you may consider renegotiating the terms of your mortgage. There are multiple refinancing options, each with different pros and cons.
If you’re concerned about an increase in your adjustable-rate mortgage, consider refinancing to a fixed-rate mortgage; this will allow for more consistent monthly principal and interest payments. You could also look into changing an existing adjustable-rate mortgage to another adjustable-rate mortgage with different terms.
Know Your Budget. Regardless of whether you’re buying your first home, a vacation home, or a rental unit, it’s important to know your budget before shopping. Set yourself and your expectations up for success by meeting with a Mortgage Advisor.
Mortgage Rates: The Bigger Picture
When it comes to the mortgage interest rate you can expect to pay, it’s important to think beyond the national economy—the mortgage rate you pay is just one piece of your final annual percentage rate.
Your APR, or annual percentage rate, is a broader measure of the cost of borrowing money. It reflects the interest rate and other charges, such as mortgage points or other fees associated with your specific loan. Personal finance factors like your credit score also have an impact.
Remember to speak with your local Mortgage Advisor if you’re concerned about rising mortgage rates when you’re ready to buy. They’ll be able to help you find the best loan option for your needs based on where you are today.
Want to learn more about rates and how they could impact your home buying journey? Our goal is to give you the tools and confidence you need to take control. Get in touch with Tim today!