Impact of Changing Mortgage Rates

Winston Churchill said, “there is nothing wrong with change, as long as it is in the right direction.” Unfortunately, the “right direction” for mortgage rates is down—and that’s not where things are headed.

Mortgage rates won’t stay low forever. The change may not be this week or next, but it surely will happen soon. The Mortgage Bankers Association and other experts believe the inevitable rate increases will begin sometime in 2011. How those increases affect you depends on whether you own or rent your home. 

Potential homebuyers

Rising mortgage rates generally increase the cost of buying a home. A rate that is 1 percent higher will cost you about $64 more per month for every $100,000 borrowed. Over the life of a 30-year mortgage, that equates to about $23,000 more in total interest costs. If you purchase while mortgage rates are low, you could save a bundle—assuming that home prices don’t change along with mortgage rates. Some theorists argue that home prices will decline if mortgage rates rise. Unfortunately, that’s not a trend you can predict with any semblance of accuracy. Your next best option is to keep tabs on rates and home prices in your area. Buy a home when you can afford it, and not a moment sooner.

Renters and mortgage rates

The relationship between rents and mortgage rates is also difficult to nail down. In theory, rising mortgage rates could put upward pressure on rents, as well. As home ownership becomes more expensive, the demand for rental properties tends to increase. Generally, rents should not rise to the point of being more expensive than home ownership. However, this rule may not exactly hold true in foreclosure-ridden communities. These areas are more likely to be flooded with renters who can’t buy a home because they have credit problems. This dynamic allows for higher-than-normal rental rates.

Homeowners and mortgage rates

Even as a homeowner, you may feel a sting from rising mortgage rates. Obviously, if you have an adjustable-rate mortgage or home equity line of credit (HELOC), rising rates will increase your monthly payments. If you only have fixed-rate mortgage debt, rising rates won’t change your payments—but they may weaken your financial flexibility. As rates climb higher, refinancing and cashing out your equity cost more and, therefore, yield less.

Home sellers and mortgage rates

Your home’s marketability could decline if prospective buyers can’t afford the higher mortgage rates. Fortunately, if you’re selling a home now, rates are not likely to change fast enough to affect your sale. But you may find yourself selling the house later, after rates have gone up. In that case, stay in tune with property values, the pace of home sales, and rental rates. If homes aren’t selling, you could rent out your home until the market stabilizes.
 
The funny thing about change is that you often can’t prepare for it, even when you know it’s coming. A rise in mortgage rates may change your circumstances but, then again, it may not. Don’t over-emphasize what hasn’t happened yet. A safer strategy is to make informed decisions based on what you know today, and then be ready to adapt when tomorrow comes.