While mortgage rates have remained at historically low levels, they now are beginning to experience incremental increases. Here, Trulia takes a look at questions to ask if you’re considering buying a home in the current atmosphere of rising rates.
Should I hurry to buy a home?
When rates start to rise, homebuyers often rush to buy a house before rates go any higher. Ralph McLaughlin, Trulia’s Chief Economist, advises against this. “Don’t rush,” he says. “Buying the wrong home can be a costly mistake to fix. Mortgage rates are just one of many factors that go into the decision to buy a home—and it certainly shouldn’t be a deal breaker.”
How do increased rates affect loan payments?
The higher rates now being seen likely won’t be a game changer for most people. “In truth, mortgage rates would have to hit 9.1 percent before renting becomes cheaper than buying a home in most major markets,” says McLaughlin. “Even in the most expensive markets, rates would need to be over 5 percent to tip the scale on the rent versus buy math.” If you think you might move in five years, there are ways to get a lower interest rate (if you qualify). You could take on a five-year adjustable-rate mortgage, which could get you a lower interest rate—plus rate increases at years four and five.
What about the price of a home?
Increased rates often mean a decrease in the number of potential buyers—and that can lower home prices. For example, even if you have to pay $100 more per month because of a rate increase, things could still balance out—or you could even come out ahead—if you get the home for less. But if competition is fierce and inventory is tight, home prices will be high. That factor, not the interest rate, will probably drive whether you can afford to buy a home. “At the end of December, we saw that the number of starter homes on the market fell by 12.1 percent, while the median list price of these homes rose by 7.6 percent,” says McLaughlin.
Will getting a loan be more difficult?
The potential for rising interest rates might make you wonder whether you can even qualify to buy a home. The good news is that the current mortgage rates probably won’t make a difference. “When it comes to qualifying for a mortgage, how rates are trending really doesn’t matter,” says McLaughlin. “What does matter is your credit score.” However, if a higher interest rate would change your status from qualified to declined, there are things you can do. “These households will either have to put a larger down payment on their dream home or find one that is less expensive,” says McLaughlin. It’s also important to comparison shop. If you no longer meet traditional loan guidelines because of higher interest rates, you may need to search until you find a lender who can work with you on a low down payment or flexible underwriting options.
Will there be more rate increases?
No one knows what the future will bring, including what will happen with mortgage interest rates. Most experts expect rates to continue to increase, but those increases could be minimal.