You don’t have to look far to see the impact today’s inflation has on everyday living. At the grocery or department store, the gas pump, and with all other goods and services, consumers are paying more. To combat inflation, the federal government raised interest rates in March 2022. This, in turn, has caused mortgage interest rates to rise as well.
How will rising mortgage rates impact the housing supply, the cost of homeownership, and the ability to obtain a mortgage or sell a home? It will depend on many things but most importantly on your unique financial situation, especially if you plan to buy or refinance a home in 2022.
What happens when interest rates rise?
With interest rates going up, mortgage rates have risen to more than 4.5% APR in recent weeks. Economists expect the higher rates will discourage some would-be purchasers. However, the continued strong demand for homes, especially among millennials, has others predicting the housing marketing won’t slow by much. That’s because the housing supply still hasn’t caught up with the demand for new homes of the past few years.
What it means for Purchasing a Home
For those buying a home, higher interest rates will mean higher monthly mortgage payments, which may require
adjusting your expected housing budget. For example, a homebuyer would end up paying $110 more a month with
a rate of 3.25% APR versus a 2.75% APR, according to a recent study by Redfin.
If you haven’t gone through the home loan pre-approval process, be sure to check rates often and utilize tools such as Travis Credit Union’s mortgage calculator to determine how much home you can afford. Buy a home that fits within your budget rather than rushing a purchase just to avoid paying a higher interest rate.
For those who have already found a home and have locked in an interest rate with their mortgage lender, rest assured the rate won’t fluctuate while you are in your lock-in period. Just be sure you can close escrow before your lock-in expires to avoid being subject to a rate increase.
Refinancing Your Home Loan
Rising interest rates will also impact homeowners looking to refinance to a lower interest rate or to do a cash-out refinance with their increased home equity. Refinancing a home loan at a lower rate is an effective way of reducing mortgage payments. As interest rates rise, however, fewer homeowners may find it a useful option.
Homeowners with adjustable-rate mortgages (ARM) should be aware of the potential increase in their payments as interest rates rise. Although ARMs carry variable rates, there are usually caps in place to limit how much they can fluctuate. Review the caps on your mortgage to be sure you can manage any increase in mortgage payments. These caps are the initial cap, the subsequent adjustment cap and lifetime adjustment cap.
Home Equity Rates Rise, Too
Rates on Home Equity Lines of Credit (HELOC) will rise with the increase in interest rates. Since HELOC rates are typically lower than credit card interest rates, they’ll still be a viable option for people looking to use their home equity to fund projects and consolidate debt.
If you’re selling your home in this still-hot housing market, you may see a shift in the buyers who are able to qualify for loans to purchase your home. Demand may soften in the face of rising interest rates, although those effects may be delayed as the mortgage pipeline is typically a longer process.
Finally, keep in mind that today’s mortgage interest rates remain near historic lows. No one knows what rates will be in 5 or 15 years so if you’re in a good financial position to purchase a home soon, don’t let rising interest rates discourage you from homeownership.
Travis Can Help
We know understanding the impact of rising interest rates can lead to many questions about mortgages and Travis has the answers. Our mortgage loan calculator can help determine payments at any interest rate, while our adjustable-rate mortgage calculator can show you the changes in your payments as rates change.
If you’re ready to buy a home view our mortgage hub to start your path to homeownership and read our blog about the Spring home-buying season. For all your other financial wellness needs, visit traviscu.org.