By now you have heard that the Federal Reserve has increased short term interest rates by 0.25%. This is the first rate hike since 2006. It is also predicted that there will be more small interest rate hikes to come. What does this mean to you as a homebuyer or homeowner? How will it affect your ability to get a mortgage or to refinance?
As interest rates rise, it will be more difficult for homebuyers to qualify for a mortgage. This is because lenders look at an applicant’s debt- to-income ratio, the percentage of an applicant’s monthly income that goes to paying debt. As the monthly payment goes up because of higher interest rates, the amount the borrower can borrow for a mortgage goes down. For example:
At 4% interest, a fixed rate 30 year $350,000 mortgage will require a monthly principal and interest payment of $1671. At 5.5% interest, a fixed rate 30 year $350,000 mortgage will require a monthly principal and interest payment of $1987. That is a difference of over $300 a month and might disqualify a borrower from qualifying for the loan. Another way to look at this: if the lender calculated a borrower would be able to pay $1675 a month for principal and interest, at 4% the borrower could borrow $350,000, at 5.5% the borrower could only borrow $295,000. The borrower would need a larger down payment for the same house or look for a less expensive home.
These are just examples of what higher interest rates might mean to you. You can calculate using your own numbers using the Zillow Mortgage Calculator.
Fixed Rate Mortgages
If you are holding a fixed rate mortgage, your rate will not change. This rate was locked in when you closed on your home and will stay the same for the life of your mortgage. If you decide to refinance or buy a new home though you will probably see a higher interest rate.
Adjustable Rate Mortgages
If you have an adjustable rate mortgage (ARM) you need to ask yourself how long you plan on staying in your current home. If you are thinking about staying for more than a few years, you might want to look into refinancing your ARM into a fixed rate mortgage. Start shopping around now to find the best mortgage for you . Keep in mind not only the interest rate but also fees and other costs associated with the new mortgage.
Home Equity Line of Credit
Adjustable rate home equity line of credit (HELOC) borrowers will be among the first to feel the interest rate increases as these loans typically adjust interest rates monthly. If you are using this type of credit, you might want to speak to your lender about converting your HELOC into a fixed rate home equity loan. You also might be able to include your HELOC balance if you are refinancing your primary mortgage.
To give you an idea of what refinancing would mean to you, look at the Zillow Refinance Calculator. This calculator will help you estimate the amount of money a refinancing could save you by comparing the details of your current home loan with new rates, terms, and other factors.
Taking the time now to see how your housing costs will change as interest rates rise could save you a great deal in the short and long term. It seems as though interest rates are heading up, so now might be the best time to start your new home search. Do you have any questions about buying or selling a home? Do you want to know more about the communities of West Essex? Fill in the form below or email me @ email@example.com and I will get right back to you.