Since election week in November, increasing mortgage rates have dominated news headlines throughout the country. Of course, many potential homebuyers associate higher rates with more money owed and simply press the pause button on their home buying process—but they shouldn’t! In fact, there are several reasons why you should not wait for rates to come back down before completing the buying process. Let’s take a closer look.
Before we discuss why rising mortgage rates should not encourage you to pause your home buying process, let’s talk about how exactly mortgage payments work. Basically, your mortgage payment is made up of four components, also known as PITI:
- Principle Payment
- Interest Rate
To calculate a mortgage payment, start by looking at your principle and interest payments. Note the cost of the home, the initial percentage you put down, the interest rate, and the length of the mortgage. Plug this information into a mortgage calculator. Once you get a number, add your property taxes, homeowner's insurance, and mortgage insurance to get your completed PITI. Though your property taxes and homeowner's insurance may change with time, your principle payment and interest rate will remain constant with a fixed rate mortgage.
If mortgage rates increase before you lock in that rate, clearly you will have to adjust and increase the interest rate in your mortgage calculator. Yes, this means the total remaining cost will be higher; however, waiting for mortgage rates to decrease may have a more detrimental effect on your monthly mortgage payments in the long run. Here are two reasons why:
- Rates may not go down in the near future: In fact, rates could drastically increase instead of decrease, leading the homebuyer to lock in an even higher rate.
- Home prices could increase: Mortgage rates aren’t the only cost that could rise in the near future. As property value continues to appreciate by nearly 6 percent each year, potential homebuyers should consider buying while home prices remain relatively low.
If rising rates have already bumped you out of your preferred neighborhood, there are several options to consider:
- Buy down your rate: Even if the rate has risen by half a point, you may consider paying points to buy down the rate, which will ultimately reduce your mortgage payments. You could even request that the seller pay this for you.
- Ask a friend or relative to gift for additional down payment: This will help you build your down payment, which can reduce your long-term monthly mortgage payments.
Of course, these are only a few of many options to consider. For more information about why rising mortgage rates should not encourage you to pause your home buying process, or to learn more about home financing options, contact one of our mortgage specialists today.