Unless you plan to buy your home with cash (lucky you!), it’s important to know what’s going on with mortgage rates these days. The bad news is that they are rising. The good news is that they have been at historic lows since the housing market crashed nearly 10 years ago — and they are still low. But since they probably won’t stay this way forever, let’s take a moment to learn what rate hikes could mean to you.
Should you hurry to buy a home?
When rates start to rise, homebuyers often rush to buy a house — in theory, these buyers are hoping to get into a new home before rates go any higher. But Ralph McLaughlin, Trulia’s Chief Economist, advises against this. “Don’t rush,” he says. “Buying the wrong home can be a costly mistake to fix. Mortgage rates are just one of many factors that go into the decision to buy a home — and it certainly shouldn’t be a deal breaker,” says McLaughlin.
How does an increased rate affect loan payments?
It’s important to note: The higher rates we’re currently seeing probably won’t be game changers for most people. “In truth, mortgage rates would have to hit 9.1% before renting becomes cheaper than buying a home in most major markets,” says McLaughlin. “Even in the most expensive markets, rates would need to be over 5% to tip the scale on the rent versus buy math.” If you think you might move in five years, there are ways to get a lower interest rate (if you qualify). You could take on a five-year adjustable-rate mortgage, which could get you a lower interest rate — plus rate increases at years four and five.
What about the price of a home?
There’s good news for some homebuyers when interest rates increase. Yes, you read that right. Increased rates often mean a decrease in the number of potential buyers — and that can bring down home prices. For instance, even if you have to pay $100 more per month because of a rate increase, things could still balance out — or you could even come out ahead — if you get the home for less.
But if competition is fierce and inventory is tight, home prices will be high. That factor, not the interest rate, will probably drive whether you can afford to buy that home for sale in Sarasota, FL or Seattle, WA. “At the end of December, we saw that the number of starter homes on the market fell by 12.1%, while the median list price of these homes rose by 7.6%,” says McLaughlin.
Will there be more rate increases?
No one knows what the future will bring, including what will happen with mortgage interest rates. Most experts expect rates to continue to increase, but those increases could be minimal. A rate increase will probably be felt most by people in expensive markets whose budgets are already stretched. “We think rising mortgage rates will cool home buying in California and the Northeast, where Trulia’s Rent vs. Buy margins are slimmest, but won’t have any noticeable impact in the rest of the country,” says McLaughlin.
Will getting a loan be more difficult?
The potential for rising interest rates might make you wonder whether you can even qualify to buy a home. The good news is that the current mortgage rates probably won’t make a difference. “When it comes to qualifying for a mortgage, how rates are trending really doesn’t matter,” says McLaughlin. “What does matter is your credit score.” However, if a higher interest rate would change your status from qualified to declined, there are things you can do. “These households will either have to put a larger down payment on their dream home or find one that is less expensive,” says McLaughlin.
It’s also important to comparison-shop. If you no longer meet traditional loan guidelines because of higher interest rates, you may need to keep searching until you find a lender who can work with you on a low down payment or flexible underwriting options.
