How Mortgage Rates Affect Your Purchasing Ability
Mortgage rates are trending upward, although they are still low by historical standards. Even a rise of a few basis points, however, can affect your ability to buy the house of your dreams. When rates start rising, some people rush to buy a home fearing further increases, while others decide to either stay put or consider purchasing a smaller, more affordable home. Those borrowers who have a harder time qualifying for a mortgage may find themselves unable to secure financing.
Types of Mortgages
Today’s buyers have access to various types of mortgages, and that means more choices in purchasing ability. Besides conventional 30 and 15-year mortgages, where the rate is locked in for the life of the loan, other mortgage options include:
• Adjustable rate mortgages (ARM) – the interest rate changes at a certain period, usually annually, and it can move up or down. Initial rates are generally lower than conventional mortgages. If you’re lucky, subsequent rate changes trend downward. If they head in the other direction, you could end up paying a lot more. However, ARMs usually can’t rise more than a particular percentage at each adjustment.
• Option ARM – while this type of ARM indeed offers more options, there’s a downside. You could end up with negative amortization, or a growing loan balance due to interest rather than paying down the loan.
• Interest-only loans – these loans allow interest-only payments for a specific time period, usually up to seven years. After that, the borrower may either refinance or make a lump sum, “balloon” payment. Borrowers may also start paying off the principal, but the payment amount increases a great deal. Interest-only loans are good choices for those who do not intend to stay in a home for the long-term.
• FHA loans- these government-backed loans are a good choice for first-time home buyers, as down payments are lower than those required by conventional lenders.
• VA loans – honorably discharged veterans are eligible for these mortgages, which do not require a down payment.
• Mortgage buydown – this options allows buyers to lower their interest rates temporarily by paying money upfront for the mortgage. In effect, you are prepaying interest. In a 2 to 1 buydown, for example, the interest rate is 2 percent lower for the first year, 1 percent lower the following year, and then reverts to the normal rate in the third year.
Your lender can crunch the numbers on a type of loan, so you can increase your affordability even if interest rates go up. However, such extra affordability is temporary in many situations, so you need to feel comfortable that you can make higher payments when interest rates rise.
Mortgage rates also affect home prices. When mortgage rates rise significantly, home prices may drop. However, the law of supply and demand always rules, and currently there is still a strong demand for housing and a limited supply. If the housing market slows considerably, it is likely home prices will trend lower.
If you’re looking to buy or sell a home or find a rental property, you need a knowledgeable, experienced realtor. Contact Island Realty Group LLC at 808-689-7407 or IslandRealtyGroup@irghi.com.