Industry News

How Are Rising Interest Rates Affecting Homebuyers and Homeowners?

August 1, 2013

rising interest rates

If you’re in the market to buy a house, or are a homeowner hoping to refinance your current mortgage loan, I’m sure you’ve been paying attention to the recent changes in interest rates.

Recent reports state that 30-year fixed mortgage rates have risen above 4% and are hovering between 4.25-4.75%. So, what does this mean for you, the consumer?

The fact is, interest rates are going up and according to economic indicators, they are expected stay that way for the foreseeable future. Here’s the “tell-it-like-it-is” advice I give all my clients:

If you’re in the market to buy a house…

When interest rates were at historic lows, homebuyers had a lot more buying power. By this, I mean buyers could get a lot more house for a lot less money.

When qualifying homebuyers for a mortgage loan, lenders use the debt-to-income (DTI) ratio to determine what monthly payment they can reasonably afford. Because your monthly mortgage payment is primarily made up of principal and interest (interest rate), the lower the interest rate, the more money you can afford to borrow.

That being said, homebuyers who were pre-approved for a $250,000 mortgage loan a few months ago may be surprised to find out they can no longer qualify for homes in that price range. If you’re in this situation, call your mortgage lender immediately to determine how the rise in interest rates has affected your buying power.

The good news is that in most cases buying a home is still a lot cheaper than renting, and interest rates are still lower than historic averages. This means that if you’re in the market to buy a home but haven’t yet found “the one,” you still have a chance to lock in a decent rate before they rise even more.

If you’re looking to refinance your current mortgage loan…

Just because you already bought your home doesn’t mean you’re not affected by fluctuations in interest rates. Homeowners who want to refinance their current mortgage loan are being affected by rising interest rates just as much as homebuyers.

For those with fixed mortgages, now is likely not a good time to consider refinancing. Could it save you a few bucks? Yes. Would it be in your best financial interest? Probably not.

When you consider the cost of refinancing and factor in how many months it would take you to recoup that cost, it probably wouldn’t make sense financially—especially when you consider how long you plan to stay in your current home. While there are lenders out there who will “help” you save money on your monthly mortgage payment by refinancing your current loan, they’re not necessarily considering your financial wellbeing.

Even though it’s not a good time for people who have fixed rate mortgages to refinance, it is, however, an excellent time for people with adjustable rate mortgages (ARMs) to consider refinancing into a fixed rate mortgage.

The interest rate associated with an adjustable rate mortgage will adjust based upon various market indices. If the term of your adjustable rate mortgage is approaching completion, your rate will adjust based upon the current market indices—which are also forecasted to increase. If you currently have an adjustable rate mortgage, I highly suggest contacting your lender to discuss how you can reduce your risk, get into a fixed rate mortgage loan and lock in a good rate before they climb even higher.

Whether you’re a homebuyer or a homeowner, interest rates have a significant impact on your financial plan. Don’t worry, you still have a chance to secure a decent rate on your mortgage loan. However, don’t wait too long! Call your lender today to get a game plan started.

Have you seen the effects of rising interest rates firsthand? How were your home buying or refinancing plans affected?