How Do Interest Rates Affect Home Ownership?
Interest rates are much higher now than they were a few years ago. But, they are still much lower than they have been in the past. Mortgage rates really soared during the late 1970s and early 1980s. It was not uncommon for mortgage rates to exceed 15% for a 30-year fixed-rate mortgage.
You may be wondering how interest rates can affect your ability to buy a home? There are several ways:
1. Monthly Mortgage Payments: When you take out a mortgage to buy a home, the interest rate determines the cost of borrowing money. Higher interest rates lead to higher monthly mortgage payments, while lower interest rates result in lower monthly payments. If interest rates are low, you can afford a more expensive home for the same monthly payment or a lower monthly payment for the same-priced home.
2. Loan Approval: Lenders use your credit score and financial history to determine whether you qualify for a mortgage. Higher interest rates can make it more difficult to qualify for a mortgage, as they increase the debt-to-income ratio, making it harder for some people to meet the lender's requirements.
3. Affordability: Higher interest rates can reduce your purchasing power. When interest rates rise, you might not be able to afford as expensive a home as you could when rates were lower. This can limit your options in the housing market.
4. Total Interest Costs: Higher interest rates mean you'll pay more in interest over the life of your mortgage. This can significantly increase the overall cost of your home, even if your monthly payments remain manageable.
The Good News!
The higher interest rates have made some buyers decide to wait. That means there isn’t as much competition. It may be easier to get the home you want at a good price. As soon as the rates go down, many buyers will flood the market and drive up prices.
If you can afford to buy a home now, do it. If the rates go down, you can refinance at the lower rate. If the rates go up, you’ll be happy you locked in at the lower rate.
