At S&A Homes, we’ve recently heard a lot of questions from homebuyers about mortgage interest rates. Here is some info that may help, and a few reasons why today’s rates should not discourage you from buying your dream home!
How do interest rates affect your home purchase?
If you’re borrowing money to purchase your home, the interest rate you pay will affect your monthly mortgage payment and will impact the price of home you qualify to purchase.
Mortgage payments are typically comprised of four factors, referred to in the industry as PITI – principal, interest, taxes and insurance. The principal pays back the money you borrowed. On the most common loans, the amount starts out as a small percentage of your payment and grows each month.
The interest is your cost to borrow the money. A lower rate means a lower cost. In most cases, the percentage of your payment that goes toward interest diminishes over time.
Taxes and insurance in each monthly payment are 1/12 of the annual cost of your homeowner’s insurance and real estate taxes. These are usually paid into an escrow account.
The amount of money you can borrow is determined by how much your payment and other monthly debt payments will be relative to your monthly income. Most lenders want to see this percentage at about 42% or lower. Higher interest rates can push up your monthly payment amount. You won’t be able to spend as much on principal each month, which means you will qualify to buy at a lower price point.
Here are 4 reasons today’s rates should not discourage you:
Interest rates are not forever. When rates come down in the future (and according to history, they will), you can refinance into a lower rate.
Interest rates are still low by historical standards. Back in the early 80s, interest rates on a 30-year fixed rate loan reached 19%! That tells us rates could get higher before they drop again. And they may never drop as much as they did during the pandemic. Rates that low had never been seen before!
Options for lowering your payment exist. Adjustable-rate mortgages and buydowns are just two of the safe options that exist for rising rate cycles. With a hybrid ARM, you start with a lower rate for a set period of time before it adjusts to a fixed rate. With a buydown, you pay fees up front to lower your rate for a set amount of time.
Low- and no-down payment or down payment assistance options are available in some scenarios. These allow you to redirect money toward a buydown or paying down other debt (increasing the amount you qualify to pay toward a home payment each month).
And here are 3 reasons to act now.
If you wait to buy:
- The home you really want may not be there tomorrow.
- You will spend more time and money paying rent (your landlord’s mortgage payment), rather than building your investment in your own home.
- You may postpone the opportunity to get your kids in the school you really want, establish friendships in the neighborhood you want, or start living the homeowner lifestyle.