Will Rising Interest Rates Slash Your Home-buying Power?
Mortgage interest rates are on the rise, there's no denying that. According to the Freddie Mac Primary Mortgage Market Survey, the average interest rate on a 30-year fixed-rate mortgage stood at 4.16 percent for the week ending Dec. 15. The average rate on a 15-year fixed-rate loan was at 3.37 percent on the same day.
No one can predict what mortgage rates will do throughout 2017, but the evidence suggests that they will continue to rise throughout the year. If you're considering buying a home, you might want to act quickly. Rising interest rates could lessen your home-buying power.
That's because increasing rates will equal a higher monthly mortgage payment.
Look at this example: Say you are buying a home for $250,000 and you come up with a down payment of 10 percent, or $25,000. You might take out a 30-year fixed-rate loan for the remaining $225,000. If you qualify for an interest rate on that loan of 4.16 percent, you'll pay about $1,095 every month, not including property taxes and insurance.
If you take out that same loan amount for the same term, but your interest rate is 5.16 percent, your monthly payment -- again not including taxes and insurance -- would come out to about $1,229. That's an increase of about $134 a month or $1,608 a year.
Increasing rates could also mean that it might be even more difficult to qualify for a loan at all. That's because of something called your debt-to-income ratio. Lenders want your total monthly debts -- including your estimated mortgage payments -- to equal no more than 43 percent of your gross monthly income.
You might be right at the 43 percent level with a lower interest rate. But if you have to settle for a higher interest rate, the resulting higher monthly mortgage payment might push your monthly debt levels past that 43 percent mark.
There's no reason to panic, though, over higher interest rates. Today's rates are still at low levels. But if you want to guarantee the lowest monthly payment, now might be the time to go home shopping.