If you have monitored mortgage interest rates in the last several months, you probably know that rates have inched up considerably since the November 2016 presidential election.
The Federal Reserve increased the rates in December 2016, and has indicated through the media that two more rate hikes are on the horizon for 2017.
It seems that the mortgage markets have already priced those increases into the rates as the typical 30 year mortgage rate in now in the area of 4.25%.
This is an increase of approximately ½ a point from a year ago.
When you consider where mortgage interest rates are today, it would be difficult to argue that rates aren’t still near record low territory.
As interest rates are on a slow rise, there are a number of myths about rising mortgage rates we would like to dispel here:
#1 Rates Are Soaring
We all know that rates have gone up, but let’s not panic. Freddie Mac reports show that the cost of a 30 year fixed mortgage went from 3.44% in September 2016 to 4.3% three months later. That is an increase of .86%.
Let’s concede that it is usually better to have a lower rate and have a lower monthly interest payment on your mortgage. But that does not consider all factors.
As the economy improves, some buyers could be making more money and easily be able to pay the higher payment.
Also, if rising rates cause lower demand and lower home appreciation, prices will fall. This could mean sure you are paying a high mortgage by .75%, but you also could pay $25,000 less for your house. Government rates like, USDA, VA and FHA loan rates continue to be priced competitively.
#2 It’s Too Late to Refinance
Baloney. If current interest rates are at least a full point lower than your current rate, home refinancing is usually worth it. In fact, for some markets, if your rate is only ¾ of a point higher than current rates, we still recommend refinancing.
We do advise however that you stay in the home long enough to offset any closing costs you will incur on the new loan.
#3 I Can’t Buy A House With Higher Interest Rates
Not true. The fact is that interest rates are still very low when you look at historical averages. Thirty years ago, your parents and grandparents paid 10% interest rates on home loans and more! Even with rates inching higher each month, you still can enjoy an interest rate in the area of 4%.
Although rates have gone up a bit since last year, borrowing money at 4% is a great deal and you are unlikely to ever see it much lower than that.
With higher rates, you do need to make sure you have the income to pay your mortgage, and your lender will ensure that your debt to income ratios are still reasonable for the home you want. The worst case scenario is that you look at a less expensive home.
Consider a hybrid loan that guarantees a fixed rate for a set period before the interest rate becomes variable. Check the 5/1 ARM rates today.
#4 I Should Get a Fixed Rate Mortgage
Not always. It is true that the classic, 30 year fixed rate mortgage is the most popular by far. In the mortgage crash, many people who had adjustable mortgages discovered that they could not afford the payments when the rates reset.
However, getting a fixed rate in a slowly rising mortgage rate market is not necessarily a no brainer. You can get a five year adjustable rate mortgage for well under 4% today. If you think that you will be earning more money in a few years, you may want to go ahead and get an adjustable rate.
Just because rates are rising does not mean that you should always get a fixed rate. We advise if rates have not gone up more than a point in the last year, you still may consider an adjustable rate.
That said, if you are the type to worry about rate fluctuations, you are indeed better suited in a fixed rate mortgage. There is no point trying to save money with an adjustable rate mortgage if it costs you sleep at night.
#5 Keeping Perspective Is Key
In 1981, people paid 16% for a mortgage and that was with good credit and 20% down. But the country still had 2.5 million home sales that year and we had 95 million fewer people in the country.
But in 2017, rates are up only a fraction, so a slightly rising interest rate is certainly no reason to panic or not buy a home.
The Bottom Line on Rates and the Market
Rates are still historically very low today, so we advise that if you are thinking about buying a home, you should do so soon. It is possible that rates could hit nearly 5% by the end of the year, but this is not written in stone.
Still, you should keep in mind that we still are in a very good environment to buy a home or to refinance – even if rates go up significantly by the end of the year.