HOW RISING MORTGAGE RATES MAY IMPACT YOU

While mortgage rates fluctuate daily and the interest rate you’ll pay on a home loan depends on multiple factors, most mortgage experts anticipate an increase in average mortgage rates by the end of 2014.

Before you panic, it’s important to recognize that mortgage rate predictions don’t always pan out. Actions by the Federal Reserve and the economy’s performance could send mortgage rates up or down at any time. Most economists predict mortgage rates will rise by the end of this year to somewhere between 5.0 percent and 5.5 percent. While of course any rate increase has an impact on your monthly mortgage payments, it’s important to recognize that mortgage rates above 5 percent are still historically low. Before the Federal Reserve began its programs to keep mortgage rates as low as possible in response to the housing and financial crisis, mortgage rates had rarely dropped to 6 percent or lower.

According to HSH.com, a website that tracks mortgage rates, average mortgage rates hovered around 7 percent in 2009, 2004 and 1999. Thirty years ago, mortgage rates averaged nearly 14 percent.

Keeping historical rates in perspective should help people realize that the housing market won’t crash if rates sneak up above 5 percent, but we’ve all become accustomed to rates under that 5 percent threshold so it will take some mental and financial adjustments to accept higher mortgage rates.

Mortgage Rates and Affordability

If you’re in a position to buy your home with cash or can easily afford higher monthly payments, rising mortgage rates shouldn’t impact your decision to buy a home. If, like many people, you’re stretching your budget to buy a home, you may need to consider a few options to handle a higher interest rate.

For example, if you’re buying a home priced at $198,000 (the national median price for a home in December 2013, according to the National Association of REALTORS®) and make a down payment of 10 percent, your loan amount will be $178,200. Your monthly payment with a 30-year fixed-rate loan at 4.5 percent would be $903. If mortgage rates rose to 5.5 percent for a 30-year fixed-rate loan, your monthly payment would be $109 more per month, or $1,012.

While $109 more per month may seem affordable, remember that you also must qualify for the loan with a maximum debt-to-income ratio of 43 percent. A higher principal and interest payment on your loan could impact your ability to qualify for a mortgage.

There are some steps you can take to offset a potential increase in interest rates:

• Buy before mortgage rates rise: If you’re ready to commit to a house and a community and financially prepared to buy, it may be best to make your move earlier in the year.
• Make a larger down payment: While this isn’t always possible, the larger your down payment, the less you need to borrow and the lower your payments will be. A larger down payment of 20 percent eliminates the need for private mortgage insurance and will also slightly reduce your interest rate because you’ll have a lower loan-to-value.
• Look for a less expensive home: One of the lessons learned during the housing crisis is the importance of sustainable homeownership. If you’re stretching too far to buy a home, you could end up in a financially unstable position.
• Continue to rent: Delaying your purchase while you save more money, pay off debt and potentially increase your income will help you afford a home in the future.
• Look into homebuyer programs: Most states and localities offer homeownership incentive programs, often limited to first-time buyers or to buyers with low or moderate incomes, that provide down payment assistance or low interest loans.

The best way to learn about your options for purchasing a home is to consult a lender who can discuss loan programs that meet your individual circumstances.