In the years that followed the 2008 housing disaster which affected global economies in collective, millions of American homeowners and homebuyers have benefited from historic low mortgage interest rates.
The Federal Reserve’s efforts to raise the economy became a major driver in keeping this norm, allowing eligible homeowners and borrowers to take advantage of the low rates and purchaseor refinance a home.
Fast forward a decade after the horrendous economic collapse, the Fedis slowly backing up from the tolerant policies it’s held for years, evident in its current move to raise interest rates.
June’s quarter-point push already marked the third time it has raised rates for this year, and is the fourth time it did since the central bank’s initial push back in late 2015.
And so because Fed rates are used as benchmark rates for financial markets, mortgage rates also followed and is projected to steadily climb forward.
If you are looking to buy a home or refinance your existing mortgage, looking at factors that could influence you as a borrower within this specific rising-rate environment is crucial in making the decision of whether or not to push your plans through. And soon – before further rate changes negatively impact your chances of getting a good mortgage deal.
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Rising rates may have different effects on markets with different strengths. Strong markets will prompt a shopper to be wary of their rates, locking before further increases occur and closing as soon as possible. Or else, they risk downgrading their options because affordability is compromised by the rising rates.
Even a single point increase in interest rate can cause drastic changes to the sum dollar that you would be able to afford.
In a weaker market, on the other hand, there is a possibility that rising rates may work for you.
High rates can push home prices down in markets where majority of home buyers rely on getting financing in order to purchase.
Paying less in upfront costs can lead to bigger investment gains should you plan to sell in the future.
Whichever the case is, it pays to pay attention to the kind of market you are looking to buy from and from there, decide on the more appropriate action plan.
Considering a Switch
Borrowers whose adjustable rate mortgages (ARMs) happened to reset during the past few years have taken much benefit from the sustained low interest rates.
Typically, adjustable rate mortgages come with low initial interests and reset after a predetermined period. Because there’s no certainty as to whether the resulting new rate will be higher or lower than the initial offer, a reset is often considered a huge leap of faith being contingent to a lot of market factors.
But although it is typical for ARM borrowers to experience soaring payments after the reset, the low-rate environment following the crisis and last year’s Brexit allowed these borrowers’ payments to remain very affordable.
So what happens when rates start to march forward?
If you’re an ARM borrower worried about the blow of increased mortgage rates to your monthly payments, now could be the best time to refinanceand switch to a fixed-rate option.
Fixed-rate mortgages safeguard your interest rates, securing a non-changing, stable mortgage payment throughout the entire life of the loan.
Considering a shorter option
Savings thousands in interest payments is also viable for borrowers carrying a fixed-rate mortgage with a rate higher than today’s.
By refinancing into another fixed-rate mortgage with a shorter term, you will end up paying three-quarters of a percentage point less than now.
But before you jump into the decision, you need to realize first that refinancing into a mortgage with a shorter term also means paying more monthly. If you want more financing freedom and flexibility, the option may not be for you.