For example, Forbes put together a great example of how this affects mortgages. If the Fed raises interest rates by 1 percent, the bank will likely raise the rate for a 30-year fixed mortgage to 4.5 percent. Remember, banks and lenders must make money too so if they are charged more to access funds, they need to raise the rates they charge customers to make the same profit.
So, a family shopping for a $300,000 home loan would pay a total of $547,000 over the life of the loan with a monthly payment of $1,520. If the fed had not raised rates and the bank kept their mortgage rate at 3.5% the family would pay $485,000 over the life of the loan with a monthly payment of $1,340.
The big question is, why is the fed raising rates and making home buying more expensive? The fed raises rates for a variety of reasons including to slow the effects of inflation. We are battling a record level of inflation in the US due to the COVID-19 pandemic, and supply and demand issues.
To cut that down, the fed raises rates to make it a little harder to borrow money. This isn’t all bad for you though! Yes, it will be harder to get a home loan, and the cost of an average home is a little more expensive but let’s get into why this may be good news for you.
Three reasons why you shouldn’t let rising mortgage rates stop you from buying a home.
Reason #1: A less competitive market.
Higher interest rates mean people won’t be able to or willing to offer $20k, $30k, or $40k over the asking price of a home. If you’ve been waiting to enter the housing market or priced out, now may be the time to enter the market with interest rates on the rise.
Reason #2: You can refinance later.
These rate hikes won’t be around forever! You can always refinance when rates start to drop again. Your 4.5% interest rate doesn’t have to be your interest rate forever! If you can, use this time to enter the market and get your first home. You may be paying a higher monthly payment for a while, but if you can swing it; that monthly payment won’t be forever!
Reason #3: You can pay down your interest rate.
You can work with your lender to lock in a lower than standard rate and use some of your down payment or savings money to pay for a lower rate. If you can save an extra, few thousand dollars before you enter the housing market then you could purchase the interest rate that works for you. Your mortgage lender can help you with this process.
We hope this article about interest rates was helpful to you. Though the rate hike is scary and inconvenient, you can leverage this hike to work in your advantage. Ask us what options are available to you, and we will help get your financing in order before you even start looking at homes. If you have any questions, we are here to help!
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