Don’t buy a home until you understand the impact of rising interest rates.
- Mortgage interest rates have risen significantly this year and are expected to rise further.
- Rising interest rates can make mortgages more expensive and it can make it harder to qualify for credit.
Mortgage interest rates for a 30-year fixed-rate mortgage are now well over 5%. Interest rates have hit record highs in recent months after veering off the record lows they hit during the pandemic. Seeing rates above 5% might be shocking considering the average 30-year fixed rate mortgage rate had fallen below 3% in 2021.
Unfortunately, it is likely that interest rates have not yet peaked. Inflation is still rising and the Federal Reserve is expected to raise interest rates several times throughout 2022. While mortgage rates aren’t directly tied to the Federal Reserve, they are are influenced by the central bank’s decision on the federal funds rate, as this is the rate at which banks can lend each other money overnight.
Higher interest rates mean your loan becomes more expensive
The biggest impact of rising interest rates is that your loan becomes more expensive. The monthly mortgage payment is based on principal and interest costs. When interest rates rise, payments rise – and so does the overall cost of financing.
If you want to play around with the numbers to see what you can afford – and experiment with different interest rates – check out our mortgage calculator for more info.
For example, if interest rates go from 3% to 5%, borrowers will pay about $100 more each month for every $100,000 in mortgage debt. This can make a big difference in your budget and the overall cost of your loan over time.
It can be more difficult to qualify for a higher-rate mortgage
Mortgage lenders look at your income in relation to all of your debt, including your mortgage loan. If your debt-to-income ratio (DTI) is too high (above about 36%), it will be more difficult to approve a loan.
If your mortgage payment increases due to higher interest rates, your DTI will be negatively impacted and loan approval will become more difficult.
Postponing until rates fall may not be the best choice
With mortgage rates so much higher today than they were just a few months ago, you might be tempted to wait until interest rates come down before buying a home. The problem is that there is no guarantee that this will happen any time soon, and as mentioned above, the opposite is likely to be the case.
If you try to wait for interest rates to go down, you might find that they go up instead, making it even more difficult and expensive to buy a home. And even if interest rates do eventually come down, you could have missed months and years of real estate appreciation and equity building.
If interest rates go down after you buy a home, you may be able to refinance to lower your future mortgage payments. But when interest rates are rising, you can’t go back in time and get a loan at today’s interest rate.
ARMs may seem attractive right now, but they could backfire
Some home buyers may be tempted by an adjustable rate mortgage (ARM) right now, as the starting interest rate on an ARM is likely to be lower than what you would be charged for a fixed rate loan. But ARMs come with unnecessary added risk. Since your interest rate is only fixed for the first few years, your interest rate and overall costs could increase.
Rather than opting for a riskier loan, it’s often a good idea to try to buy a home you can afford at today’s interest rates and shop around with mortgage lenders to get the best possible deal on a fixed-rate loan get interest rate. Hopefully this will maximize the likelihood that the buying decision is the right one over the long term as you can start building equity.
The key is to make sure your loan is affordable, even with today’s high interest rates — and that you’re financially ready to buy a home before proceeding.
The top mortgage lender of the rise of 2022
Mortgage rates are rising – and fast. But they are still relatively low by historical standards. So if you want to take advantage of interest rates before they get too high, you should find a lender who can help you secure the best possible interest rate.
This is where Better Mortgage comes in.
You can get pre-approved in just 3 minutes with no harsh credit check and lock your plan at any time. Another plus? They do not charge loan origination or lender fees (which can be as high as 2% of the loan amount with some lenders).
Read our free review