mortgage interest rates Archives

Why Rates Change

First, let’s look at why interest rates change. If the Fed never stepped in and regulated things, the housing industry would be in constant turmoil. Think of it like a supply and demand type thing. When things are good in the economy, rates tend to increase. This is to keep things on an even keel. If rates stayed too low for too long and the economy was doing well, people would keep buying until there was no more supply. This would drive prices up and inflation would be out of control. On the other hand, when unemployment is high, interest rates tend to drop to give people more buying power. It is a checks and balances type of system.

Reasons Rising Interest Rates are Good

So why would rising interest rates be good? First, it is a sign the economy is doing well. This is something we all want to hear. That means unemployment rates are down and buying is up. This is much better than a sluggish economy where everything needs a little boost in order to thrive. While you might not think a higher interest rate on your mortgage is a good thing, you will think it is good when you look at your other investments. It is a little give and take. Yes, you have to pay slightly more on your loans, but you make it up on your investments.

Another reason higher interest rates can be good is it gives you less competition. If you are in the market to purchase a new home and the economy is thriving, you may have a lot of competition. You may even find yourself in a bidding war. This means you may have to bid more for the home than you wanted to or you may lose the bid altogether. With higher interest rates, though, there is usually a smaller pool of potential buyers. This allows you to give the bid you want and possibly have a better chance at winning the bid on the home.

Reasons Rising Interest Rates are Bad

Now for the bad. Of course no one likes rising interest rates. First and foremost, it means a higher mortgage payment. This means two things.

You pay more interest over the life of the loan. Even 0.5% can add thousands of dollars on the total cost of your loan.

A higher mortgage payment means a higher debt ratio, which may mean a loan denial.

Every lender looks at your debt ratio in order to qualify you for a loan. That debt ratio includes all of your monthly payments, including the new mortgage payment. The new mortgage payment is based on the interest rate. If interest rates rise, you have a higher payment. This payment then takes up a larger portion of your monthly income. This means you have a higher debt ratio. If you were a borderline borrower with a debt ratio close to what the program allows, you might find yourself without an approval because of the higher rates.

Even if your debt ratio is okay, you might not be comfortable with the higher rate. It happens all of the time – lenders approve borrowers for more than they can afford. Even if on paper it shows that a borrower can afford a specific payment, he/she may not be comfortable with that payment. We never recommend that you take a payment you are not comfortable paying. This only puts you at risk down the road. If you find it too hard to keep up with the payments, you could end up losing your home. Rather than taking a risk, you should proceed with caution.

Impending Higher Rates Make People Buy

Have you ever heard the threat of rising interest rates and found yourself reacting? You are not alone. Everyone has the tendency to do this. When people hear that interest rates may rise soon, they rush out and buy or refinance now. This can give the economy the boost it needs. This is not to say you should be the one to run out and refinance or purchase a home, but you could give it careful thought. No one can predict for sure what will happen to the interest rates in the future, but if there is a suspicion of rising rates, it is best to do what your gut tells you.

There are good and bad sides to rising interest rates. Because it is an inevitable part of the mortgage process, you have to learn to handle it. Take a close look at your financial situation and figure out what you can afford. Do not just take a mortgage because you love a home and want it no matter what. A mortgage is yours for the next 15 to 30 years. Make your decision wisely. If rates rise and you are not sure about the new payment, wait until they fall again. They rise and fall all of the time. It is not worth making a hasty decision and regretting it down the road. This is one of the largest investments of your life, take your time and make the decision that is right for you.

It’s getting harder to find a low interest rate today. That’s not to say rates are increasing astronomically. But, they are steadily getting higher. That low mortgage rate you could once get is not as easy today.

Make Sure You Have Good Credit

Lenders look at your credit first, plain and simple. It doesn’t matter which lender you go to, they look at your credit. Making yours as strong as possible can help you secure a lower rate. The higher your credit score, the less risk you pose. This may mean a lower interest rate.

Start fixing your credit long before you apply for a mortgage. Even if you haven’t pulled your credit, make sure you pay your bills on time. This practice alone can have a huge impact on your score. You should also try minimizing your total debt load.

Perhaps, most important is the need to check your credit report for errors. You won’t know if something erroneous is reporting unless you pull your credit. Each bureau allows you 1 free credit report per year. Take advantage of it and fix any errors you see.

The more steps you take to improve your credit score, the lower the interest rate many lenders will offer.

Keep Your Debt Ratio Down

Another large factor in your interest rate is the debt ratio. The more debt you have outstanding, the riskier you are to a lender. Take a minute to figure out your debt ratio.

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Total up your monthly obligations that report on your credit report. Things like car payments, credit cards, and student loan payments must be included. Then include the potential mortgage payment. If your total debt ratio exceeds 43%, you may not be eligible for a low interest rate. You may also have trouble finding a lender that will approve your loan.

In order to lower your debt ratio, you may need to pay debts off completely. In some cases, though, you may be able to pay them down. Credit cards are a good example. If you pay the balance down, your minimum payment decreases. This helps decrease your debt ratio. If your ratio is near the maximum, this could help tremendously.

Take Out an Adjustable Rate Mortgage

Sometimes even though you have great credit and a low debt ratio, you still get a high rate. It’s just the way the market goes. Taking out an ARM or adjustable rate mortgage can help, though. This method isn’t for everyone, so proceed with caution.

An ARM offers a low “teaser” rate. The term you choose determines how long you keep that low rate. It may vary from 3-10 years. After that time, the rate adjusts. You can’t predict how much it will change, though. This is why it’s not for everyone.

Borrowers who are in the home temporarily often do well with an ARM. If you can take one out that doesn’t adjust before you move, you luck out. Even if it does adjust while you are there, you have the option to refinance. It’s a gamble, but it could be worth it if you save enough money during the teaser rate years.

Pay for a Low Interest Rate

Some lenders allow you to “buy” your rate down. Essentially, you prepay interest. You just do it in percentage points. One point equals 1 percent of your loan amount. On a $100,000 loan, one point equals $1,000.

If you decide to pay discount points, the lender will lower your interest rate. Generally, one point lowers rates ½ of a point. Each lender decides just how much you’ll save, though. The more volatile the market, the more a discounted rate will cost you in most cases.

Make a Larger Down Payment

A larger down payment helps minimize the risk for the lender. It gives you what they call “skin in the game.” The more of your own money that you have invested in the home, the more likely you are to make your payments.

A borrower who puts down the minimum 5% on a conventional loan will likely get a higher rate than someone who puts down 20%, for example. Of course, this varies by lender and loan program. The larger the down payment, the more negotiating power you have with your lender. It also gives you leverage if you shop around.

Take a Shorter Term for a Low Interest Rate

Again, lenders like loans that aren’t risky. The longer you borrow money, the riskier you become. While lenders provide 30-year terms, they don’t prefer it. If you borrow money for 15 years versus 30 years, that’s double the amount of time. Granted, lenders make more interest, but their money is still at risk for another 15 years.

If you can swing it, opt for a shorter term. It doesn’t have to be as drastic as a 15-year term. You can try a 20 or even 25-year term. Any amount of time you can knock off the term helps your case, though. The shorter the term, the more likely you are to secure a low mortgage rate.

Compare Quotes From Different Lenders

This last tip is our favorite – shop around! Don’t take one lender’s word for it regarding what you qualify to receive. There are many fish in the sea, so to speak. Get out there and see what other lenders have to offer. We recommend shopping with at least 3 lenders.

Once you receive the offers, compare the Loan Estimate from each lender. This gives you a chance to see what they have to offer. Compare not only the interest rate, but also the fees. Look specifically for discount or origination points. Also, look at the APR to see what the loan will cost you over its entire life.

In a world of rising interest rates, you don’t have to settle. There are still ways to get a low interest rate. You’ll have to work at it, though. Make sure your loan application is as attractive as possible. Also, make sure you shop around and opt for the lowest term that you can afford. In the end, you’ll come out with the lowest rate available to you.

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The Good and Bad of Rising Mortgage Rates