Buying a home is something that most people hope to achieve in their lifetime. Owning the home that you and your family live in gives you a sense of security that you don’t normally get if you are renting or living with your parents. When you own a home, you can customize it based on your preferences, improve it, and more. Unfortunately, there are many factors to consider when buying a home, especially if it’s your first time. (Read: Current Interest Rates for Home Loans – Is it Time for You to Apply?)
Unless you have a perfect credit score and a very good income, qualifying for a mortgage will prove to be fairly difficult. There is always the chance that you will qualify for less than you need, or even be rejected because of your low credit score or for being unable to prove to your lender that you are not a high default risk. Once you get passed the approval process, you will find out that the initial cost of a mortgage is very high, and will probably require you to spend all your savings at once. Between the down payment and the closing costs, you are looking at tens of thousands that you will have to spend before you can even move into your new home.
The Mortgage Interest Rate
Besides the price of the home, there are other aspects of the mortgage which will determine how much money you will be spending. One of the most important aspects of a mortgage loan is the interest rate. Mortgage rates fluctuate frequently, and make a huge difference in how much money you will be spending on your mortgage loan.
Qualifying for the best interest rate requires you to have a perfect credit score, a large income, and make a large down payment. The interest rate will also be affected by how long the loan repayment period will be. With a longer term, your monthly mortgage payments are lower, but the interest rate will be higher. If you choose a shorter term and can afford to make much larger monthly mortgage payments, then your interest rate will be lower. By being a perfect borrower and choosing a short term, you can influence your mortgage interest rate (Read: Mortgage Rates Forecast Vs. Home Mortgage Rates Today).
But there are other factors, which are out of your control, which have a larger effect on interest rates. The biggest influence on mortgage rates is the national economy. A rapidly growing economy will cause inflation, which will cause the Federal Reserve to attempt raising interest rates in order to slow down the economy. When the economy is struggling, the Federal Reserve will usually reduce interest rates in order to stimulate the housing market. Also, when there is a large number of new mortgage loans being originated, investors tend to avoid purchasing these loans, so interest rates are increased.
What Buyers Should Keep in Mind When Interest Rates are Rising
Rising interest rates usually make home buyers think twice before buying a home, or even give up on buying a home. Higher interest rates make buying a home more expensive, so many home buyers might get discouraged. However, in this economic climate, there are some things that you should keep in mind when buying a home, even when interest rates are rising.
#1 – Demand for Houses Will Be Higher
Mortgage interest rates are rising because the economy is strengthening, so buying a home right now is not such a bad idea. Rising interest rates mean trouble when they are rising on their own, but, if they are doing it together with the strengthening of the economy, it means that the demand for homes will still be high. So buying a home before interest rates increase even more is actually a good idea. Follow this link to read more.
#2 – A Lower Inventory
Buying a home before interest rates increase more may be difficult because inventories are low. This may be a problem for many buyers who are looking to buy a home right now, before an even larger increase in mortgage rates. The economy is recovering, so there is a large demand for homes, but inventories are pretty low, so the chances of finding a home that will suit your needs are slim. Statistics show that most home buyers worry about not finding a home that they like more than they worry about the rising mortgage interest rates. To read more about the effect of this on the housing market click here.
#3 – Looser Qualification Requirements
Qualification requirements are still fairly strict. Rising mortgage rates are a small problem if you are unable to take out a mortgage loan in the first place. Lenders are trying to protect themselves more than ever from giving out loans to borrowers who are a high default risk. Fortunately, because interest rates are increasing, refinancing will slow down, so lenders will, most likely, loosen their requirements for home purchase lending in order to attract more home buyers. Recently, when interest rates were near record lows, lenders were making most of their money from the large increase in refinances, but, with increasing mortgage rates, the number of refinances will start to decrease significantly.
#4 – Renting is Still More Expensive
Don’t think that, because interest rates are rising, renting will be cheaper. Buying a home will be more and more expensive than before when interest rates are increasing, but renting will still remain the more expensive option, unless mortgage interest rates rise to over 10 percent (Read: Take Advantage of Today’s Historically Low Rates).
Rising mortgage rates will make home ownership unattainable for some people, but time can be a bigger enemy. Waiting for interest rates to decrease can be a big mistake, because it may never happen and you will be losing money by renting instead of buying. On the bright side, rising mortgage rates will strengthen the economy and allow more people to qualify for a mortgage.