How to Buy a Home When Interest Rates Are Rising
Potential Paths to Help You Enter the Housing Market
Just as home prices have been steadily increasing, so have mortgage interest rates. The average rate for a 30-year fixed-rate mortgage was 4.81 percent as of Nov. 29, 2018, according to data from government-sponsored enterprise Freddie Mac's Primary Mortgage Market Survey. The rate was 3.9 percent during the same week in 2017.
For 15-year fixed-rate mortgages, the average rate has jumped to 4.25 percent from 3.3 percent a year ago, and 5/1 adjustable-rate mortgages have increased from 3.32 percent to 4.12 percent year-over-year.
How Mortgage Rates Impact Affordability
Though rates are still lower than their pre-recession levels, some homebuyers are being pushed out of the market.
The typical homebuyer lost nearly $30,000 in purchasing power since the beginning of 2018 due to rising mortgage rates, according to an analysis from real estate brokerage Redfin.
Mortgage rates can make or break a home's affordability. Using a hypothetical example, let's say a potential homebuyer wanted to purchase a home around this time last year. For a $200,000 30-year fixed-rate loan with a 20 percent down payment and an interest rate of 3.9 percent, the estimated monthly payment would have been $1,001, according to Bankrate's mortgage calculator.
Fast-forward to the present, that same $200K loan with a 4.81 percent interest rate would have an estimated monthly payment of $1,087. That's an increase of more than $80 each month.
Rising Rates Will Continue
The Federal Reserve has plans to continue raising the federal funds rate. There's another rate hike expected at the forthcoming December meeting of the Fed's policy-setting Federal Open Market Committee, and it's possible there will be up to four more rate hikes in 2019.
Mortgage rates, which are indirectly affected by the federal funds rate — are also expected to continue their upward trajectory for the foreseeable future. The 30-year fixed-rate mortgage is predicted to rise to an average of 5.1 percent in 2019 and 5.6 percent in 2020, according to a forecast from Freddie Mac.
Buying a Home When Rates Are Rising
So, how can you still make your way into the housing market in this rising-interest-rate environment? Below we highlight a few options.
- Boost your creditworthiness. Sure, your credit score might already be above 700, but there's always room for improvement. Chip away at your debt load to lower your debt-to-income ratio, review your credit reports for any lingering blemishes or errors that can be removed and consider increasing your down payment amount. Borrowers with FICO scores in the 700-759 range may see an average mortgage rate of 4.662 percent while those with scores of 760 or higher might expect an average rate of 4.44 percent. That's only a $40 difference in the monthly payment but adds up to thousands of dollars saved over the life of the loan.
- Lock your mortgage rate when it makes sense. If the interest rate your lender is offering is attractive to you at the moment, consider locking it in. That way you won't have to concern yourself when rates continue to tick up. Keep in mind, a mortgage rate lock works best when you're closing on your home in the very near future — rate locks typically last for 30, 45 or 60 days.
- Pay mortgage points at closing. Mortgage points, also known as "discount points" are fees you pay to help you get a lower interest rate on your loan. One mortgage point is equal to 1 percent of your loan amount, so on a $200,000 mortgage, one point would cost $2,000. Another advantage of mortgage points is that they might be tax-deductible. If you're already eligible to deduct the interest you paid on your mortgage, then you might be able to deduct the points paid on the mortgage as well, according to the Internal Revenue Service.
It's also important to keep in mind that your interest rate is just one component of your mortgage. There are other factors to consider, such as the type of mortgage you're borrowing and even the lender you choose. The most effective way to get a competitive interest rate is to shop around and compare Loan Estimates.
Additionally, you might be able to take advantage of a mortgage refinance if rates improve not long after you get a mortgage.