Increased Interest Rates

If you are actively looking for a new home to buy and plan on obtaining a mortgage, you may know that interest rates have been gradually increasing. As mortgage rates rise, the cost of borrowing increases. A rough gauge of this in the real estate world is for every 1% increase in mortgage rates; there is a 10% decrease in purchasing power. As a result, buyers are sensitive to rate changes and tend to worry, postpone or forgo buying if rates increase. There are a few things that buyers may not know that can help reduce interest rate anxiety: 1) When you acquire a mortgage to purchase a home, you will be making Principal and Interest (P&I) payments. This means when you make your full payment to the bank, a portion goes as principal to pay down the mortgage balance, and the other portion goes to pay interest which is the payment to the bank. It is the cost of capital, its how the bank earns money lending. When interest rates rise, you are paying more to the bank. However, to offset higher interest rates you can make principal payments through the life of the loan in addition to your regular monthly P&I payments, and this will drastically decrease your total interest paid over time. If done on a strict schedule you set for yourself; it would be the equivalent of having a low-interest rate. You obviously need the money to make extra payments towards principal every month, and that can be a challenge. But if you want that home, you will find a way to make it work, and this is the way to do it to avoid higher interest rates and wasting money on interest payments. Even if you only put a minimal amount ($100) towards principal every month in addition to your regular payment, you will save a substantial amount on interest costs during the life of the loan. Additionally, this expedites the payoff timetable, and your mortgage will be paid off much sooner than scheduled. 2) Many may not know that although rates have been rising, we are still at historically low levels at the date of this post (see graph below). In the late 1970s and early 80s, people were borrowing money at 16% plus interest. We are currently at approximately 5% for a 30-year fixed rate mortgage. In the boom of the 1990s, the 30-year fixed rates ranged from 7%-10%, and people were comfortably buying homes. The only reason rates were so low was due to the financial crises of 2007-08. The Fed artificially lowered rates to the lowest in history to spur borrowing and stock market investment to help with recovery. Rates have been at historic lows for over ten years. Since rates are still historically low, acquiring a 30-year fixed rate on your mortgage may be a wise option to consider. The fact that rates are increasing shows our economy is finally starting to come back. We can only hope that rates gradually increase and not spike. If you have a desire to buy a home for you and your family and you have the financial capacity, don't let interest rate fear keep you paralyzed. If you want a home, get it.