Mortgage rates are rising ever so slightly from their historic lows. What does that mean for you? Well in the short term it means that if you have been putting off refinancing your existing mortgage, you should probably do so now before rates rise even higher. But what does it mean if you are thinking of buying a home? It means the sooner you act, the more house you can buy.
Take for instance a $150,000 mortgage on a 15 year fixed rate. Currently you can get a 3.875% rate for a payment of ~ $1,100 a month. If the interest rate rises 0.5% to 4.375% your payment becomes $1,137 a month. If it rises a full 1.0% to 4.875% your payment jumps to $1,175 a month. At 4.875%, you would have to take out a $140,000 mortgage to get the $1,100 mortgage payment you were getting at 3.875%. That means a 1% increase in rates means you buy 7% less in house. If the interest rate jumps 2% to 5.875% you would have to get a $131K mortgage to get the same $1,100 a month payment.
However, the longer the mortgage terms, the greater the disparity. Take the same $150,000 mortgage but put it on a 20 year fixed term. Currently you can get a 4.25% rate for a payment of ~ $930 a month. If the interest rate rises 1.0% to 5.25% your payment becomes $1,010 a month. At 5.25%, you would have to take out a $138,000 mortgage to get the $930 mortgage payment you were getting at 4.25%. That means a 1% increase in rates means you buy 8% less in house. If the interest rate jumps 2% to 6.25% you would have to get a $127K mortgage to get the same $930 a month payment.
Granted, interest rates do not rise 1%-2% overnight, but if you are positioning yourself to buy a house soon, keep an eye on those mortgage rates. Yes, house prices could continue to drop, but those drops in prices could easily be offset by an increase in the interest rate that you pay. So if you are thinking of buying a home soon, hurry up and pay off your debt, build your emergency fund, and save for a down payment so you can get the best deal possible!