How the value Mortgage affects affordability
Although rates are still lower than their levels of pre-recession, many homebuyers are being forced out of the market.
Mortgage costs can make or break the affordability of a home. Let’s say a prospective homebuyer wanted to buy a home around this time using a hypothetical example last year. For a $200,000 30-year fixed-rate loan with a 20 percent down payment and a 3.9 percent interest rate, according to Bank rate’s mortgage calculator, the average monthly payment would have been $1,001.
Fast forward to the present, there would be an estimated monthly payment of $1,087 for the same $200 K loan with an interest rate of 4.81 percent. That’s a monthly increase of over $80.
The rates increase will continue
The Federal Reserve plans to continue to increase the rate of federal funds. Another rate hike is anticipated at the upcoming December meeting of the Fed’s policy-setting Federal Open Market Committee, and up to four more rate hikes may be expected in 2019.
Already expected to continue their upward trend in the foreseeable future are mortgage rates, which are indirectly influenced by the federal funds rate. It is predicted that the 30-year fixed-rate mortgage will grow to an average of 5.1% in 2019 and 5.6% in 2020.
Buying a house when rates are rising
In this world of rising interest rates, how can you still make your way into the housing market? Here are a few choices that we highlight:
- Improve your creditworthiness. Your credit score may already be above 700, but there is room for improvement at all times. Chip off your debt load to lower your debt-to-income ratio, review your credit reports for any remaining flaws or mistakes that may be removed and consider increasing your down payment number.
- When it makes sense, lock your mortgage rate. If you are currently attracted by the interest rate offered by your lender, consider locking it in. That way, when rates continue to tick up, you won’t have to worry about yourself. Keep in mind that if you close your home in the very near future, a mortgage rate lock works best, rate locks typically last for 30, 45 or 60 days.
- Pay your mortgage points at closing. mortgage points, also recognized as “discount points,” are payments that you pay to allow you get a lower interest rate on your mortgage. One mortgage point is equivalent to 1 percent of the value of your loan, so one point will cost $2,000 on a $200,000 mortgage. The advantage of mortgage points is that they could be tax-deductible. If you are already eligible to subtract the interest you paid on your mortgage, you may also be able to deduct the points earned on the loan.
It’s also important to remember that only one part of your mortgage is your interest rate. Certain considerations need to be considered, such as the type of loan you borrow and even the lender you select. Shopping around and comparing Loan Estimates is the most effective way to get a competitive interest rate.
