Are you in the market for a new home, but afraid interest rates may rise? You’re not alone. Buying a home is a big decision and can take months before you close the deal.
There are several factors that can affect interest rates. If they rise, so will your monthly mortgage payment.
When figuring out how much you can pay on your monthly mortgage, consider the worst case scenario. Determine your home loan eligibility. Next, use a mortgage calculator to determine the monthly payment using multiple interest rates.
This should give you a good idea how much your mortgage payment can fluctuate due to a change.
Don’t be caught off guard when you get to your closing. Check out our mortgage guide on how interest rates can impact your loan.
How are Mortgage Interest Rates Determined?
Mortgage interest rates are not the same for every home buyer. There are multiple variables that lenders use to determine the interest rate specific to you.
The foundation of interest rates is driven by Treasury bills, bonds, and notes. If these are up, interest rates are up. If the yield is down, interest rates will go down as well.
While the Federal Reserve sets the base interest rate, personal factors also come into play. Our mortgage guide points out a few things you should look for.
New Home Loans, Refinance Loans, and Cash-out Loans
When we think of mortgages, the first thought that comes to mind is probably someone purchasing a new home. In reality, our mortgage guide shows there are different types of mortgages.
New Home Loan
A new home loan is the first mortgage taken out on a home. It is when someone finds a property and secures financing, which changes its ownership from seller to buyer.
These loans come in the form of fixed rate, adjustable rate (ARM), conventional and FHA loans.
A refinance loan is typically done to reduce the interest rate on an existing mortgage. Rates are always changing and at the time a home is originally purchased, the buyer may have had a high interest rate.
Once the markets change or their personal creditworthiness improves, they can get better loan terms.
A cash-out loan is similar to a refinance loan. The exception being, you take out a loan for more than what is owed on the home.
The purpose of a cash-out is to get the available equity out of the home.
It is important to know how each of these loans can affect the interest rates that you receive. A cash-out loan often comes with a higher interest rate. A refi-loan may look good up front, but there can be hidden terms that raise your rate.
An adjustable rate mortgage can prove to be costly as rates will go up over the course of the loan. It is not uncommon to hear someone with an ARM lost their home to foreclosure.
Weigh your options carefully and avoid tricky financing.
Your Credit Score
Credit scores range from 300 to 850, depending on the credit bureau. The better your credit, the lower your interest rate will be. If your score is below 600, you may not qualify for a mortgage or you will have a very high interest rate.
Changes in Your Credit
As soon as you begin the process of buying a home, lenders will encourage you to watch your spending.
Having good credit is the best way to keep your mortgage rates on the low end. Don’t blow it by making costly financial decisions while trying to secure a loan.
This means no large purchases like a new car. Continue to pay your creditors on time. You may want to pay off a few credit cards or small loans to improve your score.
Hold off on changing jobs if possible.
If something transpires to cause your credit score to decrease, your interest rate can increase.
Supply and Demand
Next in our mortgage guide is supply and demand. In any business, the cost of goods will be impacted by consumer buying.
In the case of mortgage loans, it is no different. There have been direct and indirect correlations between interest rates and the demand for housing.
When interest rates are low the demand for housing increases. As the supply of homes available on the market decreases, we can expect to see a rise in interest rates.
Committed buyers are more willing to bear the added expense, especially if they find the home of their dreams.
Length of Mortgage
There are 15-Year mortgages and 30-year mortgages. Each comes with its own set of advantages.
Your mortgage will be higher if you take out a 15-year loan, but you will have a lower interest rate. You will also pay off your mortgage in half the time.
A 30-year mortgage means a higher rate and higher repayment amount. The benefit is that you have a longer repayment period and lower overall monthly payments.
As our mortgage guide has shown, it often comes down to the needs and goals of the individual buyer.
Your lender has told you what your interest rate will be and it is higher than expected. There is one thing you can do to lower your rate if you have some disposable cash on hand.
Mortgage points are a fee buyers you can pay in exchange for a reduced interest rate. It is $1000 for every $100,000 of the loan, or one percent.
By paying this amount, the buyer reduces their interest rate by a fraction. Points work best on fixed mortgages. If you do it with an ARM the reduction is only good for the term of the first interest.
More Mortgage Guide Support
We hope you found our mortgage guide on how higher interest rates can impact your mortgage payment useful.
Now is a good time to purchase a new home or refinance an existing property.
If you are in the market for a home mortgage and have questions about interest rates call us today at 913-642-8300. You can also click here to get a free mortgage quote online.