Interest Rates are Rising – But Don’t Panic

Yes, the FED has raised interest rates which has caused the 30-year mortgage interest rate to rise from 3.8% to 4.8% with indications that it will continue to climb.  Is it time to cancel your home search and continue to rent?

Let’s put things in perspective.  There was a time not so long ago when a 4.8% rate would be considered a fantastic interest rate.  When I bought my first home in 1989, the interest rate was over 10%!  Yes, the increase in interest rates will add to the monthly payment, but rental rates are rising even faster.  The current mortgage payment on a $300,000 loan with a 30-year note at 4.8% is $1,574.  However, in the rental market, an equivalent home would likely rent for well over $2,000 per month.

Additionally, the interest paid on a mortgage is still tax deductible.  Money put into a home is an investment in the future as home values increase.  The monthly mortgage payment is fixed while rental rates will continue to rise.

So, what to do?  First and foremost, talk to a lender.  I strongly suggest finding a local mortgage lender.  In Front Royal, we often recommend ALCOVA Mortgage.  Your local bank has great services and will handle commercial loans in-house, but most refer their mortgage business elsewhere.  Online services are nice, but you rarely talk to the same person twice and can get conflicting information.  By sitting down with a local mortgage professional, you learn what you can truly afford – not just the amount you qualify to borrow.

When searching for your new home, keep affordability as your first priority.  Prior to 2008, too many people bought homes they couldn’t afford to keep.  They were told that home values were rising rapidly and that a future refinance would allow them to use their homes as an ATM – never a good idea.  When the market crashed, many were left upside down (they owed more on the home than it was worth) and were forced to walk away with no home and a terrible credit score.  By sticking to a budget and buying only what you can truly afford, you can prevent this from happening to you.  Yes, granite countertops and stainless-steel appliances are nice, but are they necessary?  Can you upgrade later?  Also, consider that the home you buy today doesn’t have to be the home you own forever.  By buying now, you are investing in the housing market.  As your dream home gets more and more expensive, the value of your current home also rises.  But if you wait to buy the dream home with no investment in the market, that dream home could remain forever out of reach.