When the rate goes up

It’s not “if” the rate goes up but “when” the rate goes up; it could make a big difference for some buyers. Freddie Mac predicts that mortgage rates will be at 4.5% a year from now.Mortgage Rate History0916.png

If buyers can still afford a home with higher interest rates, it means higher payments. Higher payments might mean they won’t have the money to spend on other things like furniture or improvements to the home or an unrelated purchase like a new car.

When the rate moves 0.50% on a $250,000 mortgage, the payment goes up by $70.66 a month. If it moves 1.00%, the payment goes up by $143.74 per month, each and every month for the entire term of the mortgage which means paying over $50,000 more for the house.

The question facing every borrower in this situation is “How will you feel about having to pay more to live in the same house because you were not ready to commit?”

Then there’s the borrower who is absolutely maxed out as to what they can qualify for or sometimes, a borrower who just refuses to pay a higher payment. When that’s the case, the buyer has to make a larger down payment. In the same example, a 0.50% increase in rate would require $14,873 more in down payment. That could make the purchase impossible or require the buyer to buy a lesser price home that will not have the same amenities.

Mortgage rates have been so low for so long that many people have never experienced a different strata of interest rates as a backdrop to the home-buying process, and some think that how it is now is just how it should be. Yet some economists believe that the economy will not be strong again until mortgage rates are in the 7% range. (Which historically is actually a modest rate!)

If the necessary foundation blocks for an individual, couple or family to take on a mortgage are simply not in place, then they just aren’t. But, few feelings are worse than looking back regrettably and knowing you could have acted, but didn’t because you were waiting for all the stars to perfectly align.

To see how a rising interest rate scenario might affect you, go to the If the Rate Goes Up calculator.

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