Anyone buying a home is all too familiar with the fact interest rates have risen sharply and dramatically in the last several weeks. Buyers and homeowners alike, should expect rates to be at these levels as long as positive economic data continues to surface in the financial markets. Unfortunately for many, due to current lending standards higher rates reduce borrowing ability, in some cases, purchase price, risking ability to perform on a real estate purchase contract.
Home buyers who were qualified just months ago, in the mid 3’s are now upwards of over 4% for the same type of financing, e.g. a 30 year fixed rate mortgage.
Running The Figures…
| Loan Amount | $ 325,000 | $ 325,000 |
| Interest Rate | 3.63% | 4.38% |
| P & I Term (months) | 360 | 360 |
| Principal & Interest Payment | $ 1,482 | $ 1,623 |
| Net Savings | $ (141) | |
| COST ANALYSIS OVER 30 YEARS | ||
| Principal Paid | $ 325,000 | $ 325,000 |
| Interest Paid | $200,382 | $259,164 |
The same mortgage, is now is now $58,782 more over the life of the loan that was just months ago. An additional $141 per month, might not seem like a small number but, considering the interest over the life of the loan the numbers add up quick. Buyers ultimately will need to re-qualify with higher rates, depending on how close the figures are, qualifying could be in jeopardy.
Tips To Combat Higher Interest Rates
The last thing any responsible home buyer wants, is to get the fantastic news of getting into contract only to realize, their potential mortgage payment has now etched up over $100 per month, or thereabouts.
What to do:
- Budget for a higher payment now-give yourself a $200 per month margin of error. Doing so, will allow you to absorb news of higher rates as your target mortgage payment can be adjusted. For example let’s say you’re buying a home for $325,000 and your target mortgage payment is $1800 per month. Give yourself a window of $2000 per month. In fact, if you can’t give yourself a margin of error (things sometimes change in a mortgage/real estate transaction), you shouldn’t be buying the house as your stretching your comfort zone. On the other hand a higher mortgage payment, means a higher interest rate which also means larger tax benefits. (speak with a qualified tax professional)
- Increase Down Payment- if possible, increase the down payment amount. Lowering the loan amount reduces the principal and interest payment and the subsequent interest paid over the life of the loan. This action also reduces any applicable mortgage insurance percentages.
- Raise Deductible On Fire Insurance-if you’re setting up an escrow account with your mortgage lender, for your mortgage payment to include taxes, insurance, and and principal and interest, your mortgage payment will be higher, but, you won’t have to worry about paying taxes and insurance separately as these figures are built-in to your total payment. Raising the deductible on fire insurance, reduces the annual premium due and the subsequent monthly mortgage insurance payment, thus reducing your total mortgage payment.
- Qualify At A Higher Rate- have your mortgage company qualify you at a higher interest rate. Here’s an example: let’s say you qualify for a 30 year fixed rate mortgage at 4.875%, and you base your payments assumptions on a higher interest rate, market is at 4.375%, so if you qualify at 4.875% by definition you will also qualify at 4.375%. Because the lender is intentionally qualifying you with a higher interest rate, if rates continue to rise, you’re in the clear because you’re taking the ultraconservative approach in your decision-making. Lesson is get current rates when speaking with your lender, and also have them run scenarios .5% higher in rate. This way you can hope for the best, plan for the worst and come out successful somewhere in between.
