If you’ve been following the news lately, you know that interest rates are rising and they have been for some time. This increase in interest rates will undoubtedly have an effect on the real estate market. So what does this mean to buyers preparing for the housing search?
Your Monthly Payments Will Be Higher
The biggest difference you’ll see as a buyer is that your monthly payment - that is, your mortgage payment plus insurance - is going to increase. Unfortunately, with dollar amounts as large as the average home loan, even a quarter of a percentage increase can make a substantial difference to how much money you have to put out each month.
Let’s take this as an example: If you take out a $200,000 loan at a 4.4% interest rate, your monthly payment will be $1,002, excluding taxes and insurances. That same loan payment at a 5.5% interest rate jumps to $1,136. In total, you’d pay $48,260 more over the life of the 30-year loan. That’s a significant increase in the financial burden of your home.
As your monthly payment rises, you might find that the pool of homes you can afford shrinks considerably. Be careful not to max out your budget. Combining a big payment with hefty interest rates could leave you feeling “house poor”, or worse unable to make your payments at all. It’s best to use a mortgage calculator and work that estimated payment into your monthly budget so that you can get a feel for what this payment will mean for your financial situation overall.
You May Have Less Competition
The upside to rising interest rates is that you could find that there is less competition if you’re still willing to buy in this climate. Many would-be buyers are weary of the idea of larger monthly financial responsibilities.
For those who can afford the hike in their monthly payment, this could be a good thing. Less buyers on the market means less competition for the few homes that are available. Essentially, this could be enough to turn an aggressive sellers market into one that is more buyer-friendly by lowering sales prices and supply outweighs the demand.
Your Finances Need To Be In Tip-Top Shape
Before you can start making offers on homes, you’ll need to get pre-approved for a mortgage. In order to improved your odds of being approved, you’ll want to make sure that your financial ducks are in a row. Those whose finances are well in order tend to be given more favorable interests from lenders. Taking the time to get your financial life in shape can actually help you save big in the long run.
The biggest factor lenders look at when considering you for home loan is your credit score. They use your credit score to determine interest rates as it’s an indicator of how well you manage your debt. If your credit needs repairing, you’ll want to make sure that you’re making your payments, on time, every month. Additionally, do your best to pay as far above the minimum payment as possible so you can work on paying down your debts. A healthy debt-to-income ratio is also a factor in determining creditworthiness.
It’s also not a bad idea to talk with a lender. Even if you’re not ready to buy right away, they can look at the details of your financial situation to determine the best next steps for you to take in order to make you a qualified candidate for a mortgage later on.
You’ll Want To Lock In Your Rate ASAP
Once you are ready to move forward with buying a home, you’ll want to lock in your interest rate as soon as possible. “Locking in” a rate basically guarantees that the mortgage company will hold that rate for you for a specified period of time - usually 30-60 days - even if rates go up in the meantime. Usually, this will happen after you’ve applied for the mortgage.
You’ll want to lock in the rate as soon as possible. The rates we’re seeing today are still fairly low compared to historical standards. For example, it was not unheard of to have an interest rate as high as 20% in the 80s. While we haven’t reached that point yet, it’s still a smart move to consider buying before any additional significant spikes occur.