If you're like most people who are paying off a mortgage or looking to buy or sell a home, chances are you pay attention to where mortgage rates are heading. Consider the following strategies when deciding to buy, sell or refinance if rates stay the same, rise or head lower.
When Interest Rates Hold Steady
Average interest rates for mortgages have been at historical lows for several years, which puts you in a good position to buy or sell a home. Your buying power, meaning how much home you can afford, is strong, historically speaking. This assumes your credit is good and you qualify for a low-interest loan.
Interest rates are hovering around 4.5% for 30-year fixed-rate mortgages. This is up from when they hit a record low of 3.3% at the end of 2012 but well below the 6% range in the years leading up to the recession.
If you were to buy a home for $300,000 with a 20% down payment and finance the remainder with a fixed-rate 30-year loan at 4.5% your monthly payment would be $1,216.04. Financing the same home at 6% would raise your payments to $1,438.92, over $200 more a month. Today’s lower rates allow you to buy more home with the same monthly payments you would have paid for a smaller home with higher interest rates a few years back.
Historically low rates for the last several years have also helped the housing market rebound, albeit slowly, since the financial markets collapsed in 2007. This is good news for sellers, many of whom have seen home prices recover from recession-level lows. (For more, see: Mortgages: Fixed Rate vs. Adjustable Rate.)
If Rates Drop
After years of historical lows, mortgage rates have been rising. Theoretically, at some point, they could go down again. If they do, the above still holds true.
If you have an adjustable rate mortgage (ARM) and rates fall or remain the same you may want to consider refinancing with a fixed rate loan to take the stress out of worrying about rising rates in the years to come. Interest rates for adjustable rate mortgages, also known as variable rate mortgages, are lower initially than fixed rate loans for a given period – five years, for example. After the introductory period ends, rates rise according to market indexes, eventually surpassing the rate for fixed rate loans. This can increase your monthly payments substantially.
If you have a fixed rate loan and rates fall, it is worth looking at refinancing it into a shorter term loan. If, for example, you have 20 years left on a 30-year mortgage it may make sense to refinance the remaining 20 years into a new 15-year mortgage. Rates on 15-year mortgages are also lower than 30-year mortgages. Combine that with a rate drop and you could save on the amount of interest paid and pay off your mortgage sooner.
When refinancing always consider your unique set of circumstances. Factor in closing costs and how long it will take to realize the cost benefits. How long, for example, do you plan to live in your home before selling? Will you break even before you plan to sell? Generally speaking, the larger the outstanding mortgage, the more impact lower rates can have on your monthly payments. (For more, see: Fixed or Variable Rate Mortgage: Which Is Better Right Now.)
And, of course, lower rates mean you can afford more house – and more people can afford your house – so it can be a good time to buy or sell a home.
When rates rise and you have a low interest fixed rate mortgage and are not looking to sell or buy, you can happily stay the course and sleep well at night. But if you need a larger home or have to relocate, keep in mind the long-term view that, historically, home values have kept up with inflation. In addition, as inflation rises, your mortgage payments on a fixed rate loan remain the same. (For more, see: How to Shop for Mortgage Rates.)
Also consider that median prices for homes have risen post-recession. If the value of your home has gone up, so has your equity. Equity is the amount of the home you own, minus the outstanding loan balance. (For more, see: Should You Refinance Your Mortgage When Interest Rates Rise.)
A 10% rise in value on a $300,000 home means $30,000 more in your pocket when you sell. This can help with putting down a larger down payment when you buy your next home and help offset higher interest rates by lowering your monthly payment. (For more, see: Got a Good Mortgage Rate? Lock It In!)
While a rising interest rate environment isn't ideal for buying and selling, if it comes with more equity, that extra money can help cancel out the effect of higher interest rates.
The Bottom Line
The consensus is that interest rates in 2018 and beyond will continue to rise as the Federal Reserve has been periodically raising its benchmark rate and is forecast to keep doing so. That means would-be homebuyers should consider acting now. Of course, there's always the chance that rates will drop in the future. If that's the case, buyers should be prepared to capitalize on any dips.
Because rates are still relatively low, homeowners with older mortgages who haven't yet refinanced should consider whether it makes sense to do that to secure lower monthly payments. And homeowners with ARMs should waste no time considering whether they should switch to a fixed loan. As always, closing costs and your own timeframe (how long do you plan to stay in your current home?) should be factored in.
- Check Out Current Mortgage Rates
- How Interest Rates Work on a Mortgage
- Understanding the Mortgage Payment Structure
- Mortgage Points: What's the Point?
- Mortgages: Fixed Rate vs. Adjustable Rate
- Fixed or Variable Rate Mortgage: Which Is Better Right Now?
- Finding the Best Mortgage Rates
- Got a Good Mortgage Rate? Lock It In!
- The Most Important Factors that Affect Mortgage Rates
- Adjustable Rate Mortgage: What Happens When Interest Rates Go Up
- How Interest Rates Affect the Housing Market
- Is House Price or Interest Rate More Important?
- 7 Sneaky Low-Rate Mortgage Tricks
- Shopping for Mortgage Rates