How to Consider Interest Rates When Buying a Home
What is your view on the current interest rate environment for mortgages and how should potential buyers strategize around interest rates? originally appeared on Quora: the place to acquire and share knowledge, allowing people to learn from others and better understand the world.
Rates are usually one of the first things people look for when considering buying a home, and unfortunately mortgage rates are rising faster than many of us thought. Buyers should consider the impact that higher mortgage rates will have on their overall purchasing power, given that what might look like a small rate change could actually amount to hundreds of dollars more each month. for your mortgage, which many people cannot afford today. Ideally, your housing expenses should not exceed more than 28% of your gross monthly income. Free online tools like The Credit Karma Home Buying Toolcan give you an idea of how much you can afford to pay for a home, your estimated monthly payment, and how interest rates change in the equation.
It’s hard to predict where mortgage rates will move, because there are so many factors at play that influence the movement. However, we could see mortgage rates continue to rise depending on signals from the Federal Reserve. In fact, as I write this, mortgage rates have soared above 6%, more than double what they were a year ago. Due to accelerating inflation, all indicators point to an acceleration in the pace of rate increases, which indirectly affects mortgage rates.
Patience is key when shopping for a home, but when it comes to pricing, it really depends on what you need and what you can afford. In more pressing cases, whether you’re moving to another city or state or expanding your family and needing more space, you might be less concerned about certain factors like seasonality or getting a mortgage rate at the bottom of the scale. And while we’ve gotten used to seeing record high mortgage rates in recent years, historically speaking, rates have averaged close to 8% closer together over the past 50 or so years. What I’m saying is, if you’re eager to get into a home – especially for those looking to build a generational estate – but rates are the only thing holding you back, you’ll probably have the option to refinance at a lower rate down the line. . But above all, you need to make sure you are in a good financial position to take on what will probably be the biggest financial obligation of your life.
For those who need to get into a home fast but are put off by high rates, in addition to getting your credit and debt-to-income ratio in order, consider an adjustable rate mortgage (ARM). ARMs are gaining popularity again – Zillow reported that more than 12% of borrowers applied for ARMs in June and July, the highest percentage since August 2007 – as buyers look for ways to lower their monthly payments. ARMs allow you to do this because they generally offer a lower initial rate than a more traditional 30-year fixed, and can be a more affordable way to enter the market, especially if you don’t plan to be in a house for all your adult. life. However, it’s important to remember that after an initial period (usually 5, 7, or 10 years), ARM interest rates reset each year, meaning monthly payments will go up or down depending on the market.
And finally, always shop! Regardless of the rate environment, you should always shop around to find a home loan with the best possible rates and terms. Compare different mortgage offers from a range of financial institutions and marketplaces. Start your search with your existing bank and credit union, as they might offer you better rates since you have an existing banking relationship with them.