If you’re like most people who are paying off a mortgage or are looking to buy or sell a home, chances are you pay attention to where mortgage rates are heading. Consider the following strategies when deciding to buy, sell or refinance if rates stay the same, head lower or rise.
Staying The Same
Average interest rates for mortgages have been at historical lows for several years. If this trend continues you are in a good position to buy or sell a home. Your buying power, meaning how much home you can afford, is strong historically speaking. This assumes your credit is good and you qualify for a low interest loan.
Interest rates are hovering at just above 4% for 30-year fixed-rate mortgages. This is up from when they hit a record low of 3.3% at the end of 2012 but well below the 6% range in the years leading up to the recession.
If you were to buy a home for $300,000 with a 20% down payment and finance the remainder with a fixed-rate 30-year loan at 4% your monthly payment would be $1,145.80. Financing the same home at 6% would raise your payments to $1,438.92, almost $300 more a month. Today’s low rates allow you to buy more home with the same monthly payments you would have paid for a smaller home with higher interest rates a few years back.
Historically low rates for the last several years has also helped the housing market rebound, albeit slowly, since the financial markets collapsed in 2007. This is good news for sellers, many of whom have seen home prices recover from recession-level lows.
If Rates Drop
While the consensus appears to be that mortgage rates will rise after years of historical lows it isn’t out of the question that they could go down. If they do the above still holds true.
If you have an adjustable rate mortgage (ARM) and rates fall or remain the same you may want to consider refinancing with a fixed-rate loan to take the stress out of worrying about rising rates in the years to come. Interest rates for adjustable-rate mortgages, also known as variable-rate mortgages, are lower initially than fixed-rate loans for a given period, five years for example. After the introductory period ends rates rise according to market indexes eventually surpassing the rate for fixed-rate loans. This can increase your monthly payments substantially.
If you have a fixed-rate loan and rates fall it is worth looking at refinancing it into a shorter-term loan. If, for example, you have 20 years left on a 30-year mortgage it may make sense to refinance the remaining 20 years into a new 15-year mortgage. Rates on 15-year mortgages are also lower than 30-year mortgages. Combine that with a rate drop and you could save on the amount of interest paid and pay off your mortgage sooner.
When refinancing always consider your unique set of circumstances. Factor in closing costs and how long it will take to realize the cost benefits. How long, for example, do you plan to live in your home before selling? Will you break even before you plan to sell? Generally speaking, the larger the outstanding mortgage the more impact lower rates can have on your monthly payments. (For more, see: Fixed or Variable-Rate Mortgage: Which Is Better Right Now.)
If rates rise and you have a low interest fixed-rate mortgage and are not looking to sell or buy you can happily stay the course and sleep well at night. But if you need a larger home or have to relocate keep in mind the long-term view that historically home values have kept up with inflation. In addition as inflation rises your mortgage payments on a fixed-rate loan remain the same. (For more, see: How To Shop For Mortgage Rates.)
Also consider that median prices for homes have risen post-recession. If the value of your home has gone up so has your equity. Equity is the amount of the home you own, minus the outstanding loan balance.
A 10% rise in value on a $300,000 home means $30,000 more in your pocket when you sell. This can help with putting down a larger down payment when you buy your next home and help offset higher interest rates by lowering your monthly payment. (For more, see: Got A Good Mortgage Rate? Lock It Up!)
The Bottom Line
The consensus is that interest rates will rise as the Federal Reserve‘s quantitative easing bond-buying program is tapered off. That means would-be homebuyers should consider acting now. Of course, there’s always the chance that rates will drop. If that’s the case, buyers should be well-prepared to capitalize on any dips. Existing homeowners should consider whether it makes sense to refinance to secure lower monthly payments. As always, closing costs should be factored in.