How do Higher Mortgage Rates Affect You?

Over the course of the last two weeks, mortgage rates “skyrocketed” from 4.85% to 5.45%. Some people are acting like this is the end of the world, but really it’s not. Although it will affect people’s bottom lines, in the long run it’s probably good for the economy.

Higher Interest Rates and Your Current Mortgage
If you already have a fixed-rate mortgage, then higher interest rates have no immediate affect on you. If your rate is already around 5.5% and you were trying to refinance, there’s no point in doing that now. However, it probably doesn’t really affect you because most people were unable to complete a refinance when rates dropped – the banks were too swamped to close the loans during the lock period.

If you have a rate above 6%, then it’s still worthwhile to refinance, and it may actually be easier to close now because there are fewer people trying to do it.

If you have a variable-rate mortgage, now is still a good time to try to refi into a fixed rate. Ultimately, mortgage rates will have to move higher. I don’t think we’ll see the double-digit rates of the 1980s, but 6-7% is not unthinkable.

Higher Interest Rates and Prospective Buyers
If you’re trying to buy a home, then higher interest rates could impact your ability to buy. When my husband I were first approved for a loan, rates were around 5.5% and we had 15% down. We set our max price at $600K. When rates fell to 4.85%, we could have pushed our limit up a little, but chose not to. With rates higher again, we’re back to where we started. The difference for us is about $270 a month, but we had already budgeted that amount.

If you don’t have 20%, or are trying to do an FHA loan with 3.5% down, then higher interest rates could reduce your price range. These loans have PMI, which is already $200 a month extra (in the $600K price range). Add an extra $310 a month in mortgage costs, and you may not be able to afford that anymore.

However, if you can still afford to buy, you may see less competition for homes, and you may actually be able to close your loan in 30 days because loan processors aren’t overburdened with refi applications.

Why Did Interest Rates Rise?
Interest rates rose because they were so low that it was inevitable. Rates only dropped as low as they did because Treasury was buying up bonds. The US can’t afford to continue that forever. Non-Treasury bond buyers were demanding higher yields at the same time that a stock market rally was decreasing demand for bonds. Bond buyers were also concerned about inflation, which is another reason rates moved higher. The economy needs bond buyers in order to make a complete recovery.

In addition, the short-term Fed rate is currently 0%. It can’t stay there. Some experts expect the Fed to increase it by the end of the year, which is a hopeful sign that the economy is improving. When that rate rises, other rates will probably rise with it. It’s not a direct correlation, but it has an effect.

Some mortgage experts predict that rates will rise a little more and then come down again. Probably not as low as 4.85%, but I consider anything below 5.5% to be a great rate, and 6% to be completely reasonable.

What Should You Do?
Rather than setting a price based on the lower interest rate, figure out what you can afford to pay each month regardless of the current rate. Ask your mortgage broker to use the current interest rate to give you an estimate for the home price that correlates to the monthly payment you can afford, but also ask what you could qualify for if rates went up to 6%. Use that number as a guide to what you can afford. Then you’ll be in an even better situation if rates fall again.

Also keep in mind that higher interest rates often result in lower home prices, because people can’t afford to overbid by quite as much. You could end up getting the same home with the same payment for a lower price if this trend continues.

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