Higher interest rates mean individuals will pay more for the money they borrow to purchase a home. Their monthly mortgage payments will also be higher. For many people, higher interest rates will effectively price them out of the homebuyer’s market, even though mortgage payments may be less than monthly rent.
Fixed Interest Rate
A 30-year fixed rate mortgage used to be the norm, providing individuals with the best option for buying a home. While a fixed-rate mortgage is beneficial when interest rates are low, it also has the potential to lock buyers into a higher cost if interest rates go back down. For many, that scenario means they’ll need to refinance.
Fixed interest rate mortgages provide greater flexibility in the event of a job loss or an increase in income. When income increases, individuals can make an extra payment, thereby reducing the amount of interest paid over the course of the mortgage and shortening the length of repayment.
Adjustable Mortgage Rate
An increasing number of lending institutions began issuing adjustable-rate mortgages (ARMs). The mortgages are great when interest rates are low, but are adjusted to reflect every increase or drop in interest rates. Those that opt for an ARM will see ever-increasing monthly payments as interest rates go up.
Even if interest rates are low, a person’s credit score has a major impact on the interest rate for which they qualify. Lending institutions use credit scores to determine what interest rate an individual will be offered. Debt-to-income ratio also enters the equation. Lenders want the ratio to be below 30 and it’s one of the top reasons that people are declined for a mortgage.
Large down payments will reduce the amount of money that will be financed toward a home. Individuals have no control over the interest rate, but they can work to maintain a high credit score and save a larger down payment to help alleviate the pain of high interest rates.
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