Expert advice on how to handle rising interest rates if you’re considering buying a home
Estimated reading time: 2-3 minutes
In January, mortgage interest rates were around 3% to 3.25%. Fast forward to now and they are 5% or more. This 2% increase has a significant financial impact on anyone considering buying a home.
According to experts from The Stern Team, for every 1% increase in an interest rate, it takes away 10% of affordability. This means that if you were approved for $500,000 and interest rates increased by 1%, you are now approved for only $450,000.
In a rising interest rate environment, buyers need to buy below their maximum buy point to compensate. A item for NRP explains, “If you just look at interest rates, the 2 percentage point rise in interest rates we’ve seen so far adds $115 to the monthly payment for every $100,000 you borrow on a 30-year loan.”
The Stern team advises keeping an eye on interest rates and making sure you have a new approval with your lender every few weeks. Also check with your lender to find out what programs they have. For example, you might be able to lock in an interest rate for 90 days or they might be willing to let you float to a new rate if rates go down.
Six more increases are likely by the end of 2023, according to a report from the New York Times.
Prolonged low inflation means home buyers have become accustomed to mortgage rates that have remained low for several years. In fact, a Bank Rates Article notes that the current level is the highest since April 2010.
Although today’s rate is the highest in 12 years, we are far from the peak reached in October 1981 when the The 30-year rate reached 18.4%.
A benefit for some homebuyers is that rising rates will force some people out of the market. “For some buyers, general inflation and the associated mortgage rate hikes mean less budget flexibility to search for freshly listed homes,” said one. CNBC report Explain. “For those who can afford to persist, a silver lining could be relatively less competition for more home options for sale, which could lead to some relief from the relentless dynamics of home prices.”