Home Ownership
During the Great Recession, people took advantage of rock-bottom interest rates to lock in homes while prices were low. Rates were lower than people had ever seen them and those who bought then have likely only seen their property appreciate.
Since the Federal Reserve started raising interest rates, people have started to wonder: should I buy a home now that rates are going up?
Interest rates are inherently tied to the number of mortgage applications. The week of Feb. 28 saw a 5.8% increase in mortgage apps as rates dropped down. Are those people smart for taking advantage of lower rates or are they taking a huge risk?
Read below to see if buying a home is still a good idea now that rates seem to be increasing.
Buy When You Can Afford a House
Too often people buy homes because they’re worried about interest rates or the housing market. They don’t want to miss out on a great deal or be unable to afford a house in the future. But that’s the opposite state of mind you should have.
All the extra fees involved with buying a home mean that you likely won’t see a positive return on your investment until you’ve spent at least five years there. Instead of buying a house out of fear or anxiety about the market, you should consider whether you want a home and if you can afford one.
If you want to buy a home now because of future rate increases, there are a few questions you should answer first:
- How much research have you done on your current market?
- Have you looked at homes in neighborhoods you like?
- Do you know how much you can afford?
- Do you have enough for a down payment?
- Will your housing costs increase once you buy a house?
- Are you committed to the location?
- Are your jobs secure or is there possibility of a transfer?
- Do you know what kind of rates you qualify for?
- What’s your credit score?
You Can’t Predict the Future
In investing, timing the market is one of the cardinal sins. No one can predict what’s going to happen so buying a house because of future interest rate changes is not a good idea.
Yes, interest rates will likely increase because they’ve been low so long. But hedging your housing bets on interest rates being the lowest point right now isn’t a good idea.
Rates Are Still Low
Despite people’s fears about rates increasing, rates are still fairly low. According to US Bank, mortgage rates for 30-year fixed mortgages are 4.5% and 3.750%. They’re not as low as they were during the Great Recession, but they’re a great deal for a couple buying a starter home or a family upgrading to a larger house. To compare, rates in 2008 before the market crashed were closer to 5.5% or even higher, according to Freddie Mac.
If you are worried about higher rates and want to buy a home, you still have a great deal of control as to what kind of rate the bank offers you.
To get the lowest rate possible, you should have a credit score of at least 700, proof of stable employment, a down payment of 20% and savings in the bank. Those who are self-employed will also need to provide two year’s worth of tax returns to provide income. Those factors can affect what kind of rate you’ll get more than the current market.
You can find possible offers online through sites like Lending Tree or by contacting your current bank or credit union.
Budgeting, Home Ownership, Saving
Once you’ve locked in a mortgage, it’s easy to think the deal is done (and a lot of the time you want to forget about the piles upon piles of paperwork you’ve just gone through). You assume you’ll make your payments on time and enjoy your new home into your happily ever after future. Sounds easy, right?
That’s definitely an option, but not the best one for the long term. Depending upon when you purchased your home and your timeframe for staying in it, there are plenty of ways you can whittle away at your monthly payment, save on interest and generally decrease the total cost over the lifetime of your loan. We’re not talking pennies here – we’re talking thousands of dollars a year.
Here are some of the best ways to do that, with examples of just how much you and your family could save on your mortgage.
Switch to a Lower Rate
You can refinance and save on interest without switching to a 15-year term. A 25-year $200,000 mortgage at 4.5%, when refinanced to 20 years at 3.5% will result in $171,619.34 less interest. That’s a savings of $8,550 per year.
It’s best to refinance when interest rates are low and you have an excellent credit score – usually 750 or higher. If you’re in the process of rebuilding your credit, consider holding off for the time being and also be sure to factor in any fees involved with the refinance process and how long you anticipate staying in the home.
Get Rid of PMI
Private mortgage insurance (PMI) is what borrowers pay when they make a down payment that is less than 20% of the home’s cost. PMI protects the lender in case you fail to make your payments in full.
Most lenders charge between .5 and 1% of the loan for PMI each year. For example, PMI on a $300,000 loan would cost $3,000 a year or $250 a month.
If you’ve reached 20% or more in equity, you can get rid of PMI by refinancing or asking your lender to drop it. Not every loan provider drops PMI automatically once you reach that threshold, so you might have to remind them. Some won’t drop PMI at all, so you’ll have to refinance to get rid of it.
Make a Bigger Down Payment
The smaller down payment you make, the higher your monthly payments will be. For example, a $300,000 home with a 3.5% down payment, 30-year mortgage with 4.5% interest rate will have a $1,467 monthly payment. A 20% down payment on that same mortgage would save the borrower more than $250 a month or $3,000 a year (and over $40,000 in interest over the life of the loan).
It will take longer to cobble together a bigger down payment, but you could save thousands of dollars on interest if you wait. Obviously, this isn’t an option for those who’ve already signed on the dotted line, but anyone still in the process of locking in their mortgage should consider taking this route.
Refinance to a 15-Year Mortgage
As you may have guessed, a 15-year mortgage comes with a higher monthly payment than its 30-year counterpart, but (and this is a BIG but) it comes with substantially less interest. For example, a $250,000 mortgage with a 30-year term and a market-average 4.25% interest rate will have a monthly payment of $1,229.85. You’ll pay $192,745.98 in interest over 30 years.
A 15-year mortgage with a 3.625% interest rate will have a monthly payment of $1,802.59, but you’ll only pay $74,466.67 in interest. That’s 2.5 times less than the 30-year option.
Helllooo money saved!
Make an Extra Payment Each Year
Making an extra payment each year can decrease your mortgage term without the hassle of refinancing every time interest rates go down. The easiest way is to divide your monthly mortgage payment by 12 and add that amount every time you write a check.
For example, if you pay an extra $100 a month for a 30-year $200,000 mortgage at 4.5% interest, you’ll pay it off five years sooner and save $31,746 in interest.
