If you are planning to purchase a home soon, paying close attention to and understanding interest rates is a critical step in the process. A higher interest rate means you will pay more for the mortgage each month. A 1% increase in interest rates decreases a buyer’s purchasing power by more than 10%!
Current mortgage rates are now at a level that was last seen in August 2011, which means the recent rise in mortgage rates is a concern for anyone seeking to buy a home soon. While historically still low, it puts renewed focus on the importance of a low interest rate.
Interest and Your Monthly Payment
Since the interest rate can increase a monthly payment on a new mortgage, homebuyers have the option to increase their down payment to reduce the principle amount. However, your monthly payment will still be higher than what you could have gotten in 2012 when interest rates were below 4% for much of the year, but you can even it out with a larger down payment.
Calculate what the monthly mortgage payment will be based on the down payment amount and the principle balance amount to know what you can afford.
Monitor Watching Interest Rates
The type of property you plan to invest in will make a difference on the monthly payment. Pay attention to the interest rates to see what market is going up and down. For example, condo investments can be more prone to fluctuations compared to traditional housing markets.
Some people assume that when the interest rates increase, the housing prices will fall slightly to make it easier for homebuyers. Looking over the past few years of housing trends, this is not the case. Always watch the housing prices, and know the interest rates to understand the amount of a loan you will need.
So with all the ups and downs of interest rates, what does it mean for anyone hoping to purchase a home in the near future? Should you wait until the interest rates are lower, or will they keep climbing? Based on history, when the interest rates increase they are prone to stay higher for several years.
Understanding Your Situation
Since the rates aren’t likely to drop back to the low 3.5% of 2012, it’s a good idea to act quickly to lock in as low a rate as possible. While you should never over-extend yourself financially when buying a new home, the last thing you want to happen is to miss out on the home you want at a price you can because you were preoccupied about interest rate fluctuation.
If you’re unsure when you’ll be ready to buy, you can still get pre-approved or re-pre-approved so you are ready to act. Compare your debt-to-income ratio and meet with mortgage companies to find out what you can qualify for.