First time home buyer fears of a housing market crash or even just a gradual fall in house prices haven’t been enough to put them off from getting a foot in the housing market. However, they’re also having to contend with and higher interest rates. This article from Wealth of Geeks suggests fears of increased rates are overdone.
Getting a mortgage loan for under 4%, used to be about as likely as spotting a unicorn eating dinner with BigFoot. But one good thing the pandemic gave us was historically low interest rates – sending many after the dream of home ownership.
Sadly, every party must come to an end.
Interest rates have started climbing back from where they’ve dwelled for the last decade. The Mortgage Reports website stated that mortgage rates on a 30-year fixed mortgage were 5.25% in mid-May.
This rate is over 2% higher than when they were at their lowest in 2020— and that increase spooks first-time homebuyers hoping to get into a house in 2022.
Mortage Rates and the First Time Home Buyer
The question is, should they be? Are these rising mortgage interest rates a reason to hold off on buying a home? Or should buyers take a deep breath and jump into the sea of homeownership even with higher interest?
Two mortgage experts went on record with Wealth of Geeks, advising against delaying home-buying plans.
How Much do Mortgage Rate Increases Affect Mortgage Payments?
It may shock first-time homebuyers that a slight increase in the mortgage interest rate doesn’t generate much of a change in what they’ll be paying every month.
Alonzo Stanley, a Mortgage Loan Officer for Bell Bank Mortgage, recently walked us through the numbers. “A rate change of half a percent (.5%) can reduce your purchasing power.
For example, a $1600 principal and monthly interest payment at 5% may have an associated loan amount of $298,051, whereas a 5.5% (5.650% APR) at $1600 may be reduced to $281,795.”
In the example Alonzo offered, the buyer could afford a home price of roughly $16,000 less than before. The options for that buyer would be to cough up the extra money every month or shop for a less expensive house.
Still, this isn’t a HUGE change from the original plan. If the borrower kept shopping in the same price range, their monthly payment would increase by around $33 a month.
An online mortgage payment calculator can help put into perspective how a mortgage interest increase impacts your monthly payment would be.
Should The First Time Buyer Go Ahead with Their Plan?
When it comes to buying a home for the first time, it can be challenging to know when you’re ready.
However, if you’ve previously decided the time is right, don’t let the recent interest rate increase derail your plans.
After all, you can’t go back in time and secure previous rates. No one knows the future, but it’s likely cheaper to buy a house now than it may be over the next few years.
Assistant Vice President of First Horizon Jamie Rice‘s advice was succinct: “buy.” He explains, “everyone is still buying. If you wait, someone else will buy it.
There was a report by the Builders Association that stated even if every builder constructed houses at maximum capacity, there would still be a housing shortage at the end of 5 years. The longer someone waits, the more they will pay.”
How Can Buyers Offset Higher Interest Rates?
First-time homebuyers can take these three steps to ensure that higher interest rates don’t hinder their ability to buy a house.
- Make a larger down payment. A higher percentage down means less to finance, which equates to a smaller mortgage payment. For example, if you buy a $300,000 home and planned to put $60,000 down at 4.5%, your monthly payment on a 30-year fixed loan would have been around $1500. If your interest rate is now 5%, putting an extra $15,000 down will keep your payment about the same.
- Buy points. Homebuyers planning to stay in their homes for several years may decide to invest in buying points. In this scenario, the borrower pays money for a lower interest rate for the life of the loan. Each point costs 1% of the home price and usually reduces your mortgage interest rate by .25%. Talk to your loan officer to ensure you’ll come out ahead if you buy points.
Jamie, however, doesn’t typically recommend buying points. “For every .125 you spend to lower your rate, it takes 18 months to break even. So, if you spend .5 discount points to lower the rate by .125%, you break even in 6 years. Statistically, you have a mortgage for seven years.
As soon as rates drop, you are refinancing. If that’s before six years, you lose money.”
- Work on their credit score. Excellent credit scores get you admitted to the elite credit offerings and best rates. Just improving your credit score a few points may make the difference in a quarter percentage point or more on your interest rate. Over time, a high score can save you thousands of dollars! Pay your bills on time every month, keep your credit card balances low and avoid applying for new credit if you can. Pull your credit report every three months and dispute anything that’s reported in error.
What Will Mortgage Rates Do Over the Next 18-36 Months?
Of course, nobody knows for certain what will happen to mortgage rates in the future, but they will likely continue rising. Alonzo comments, “I’m not going to make a prediction.
However, present forecasts indicate a continued increase for the short term, at least.”
First-time homebuyers who are worried about the rising interest rates should stay calm and on course. After all, the mortgage rates are still low compared to the rates from the last 40 years.
Even if it’s more money every month than you originally planned, homeownership allows you to build equity and stop spending money on rent.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas has investments in real estate.
This article was produced by Wealth of Geeks and syndicated by Tim Thomas / Timothy Thomas Limited.
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