Homebuyers have benefited from historically low interest rates for the past several years, with rates hovering between 2% and 3%. However, mortgage rates have been trending upwards and are expected to increase even further. If you have been putting off buying a house or refinancing because you wanted to lock in a low interest rate, you may want to act now, since rates can rise at any time.
That being said, higher mortgage rates can actually come with various benefits for homebuyers and the housing market. If you missed out on historically low mortgage rates, don’t fret – take a look at the following reasons why higher mortgage rates can be beneficial.
1. House Affordability and Availability
As mortgage rates increase, demand for houses tends to decrease. This could help to tame the wild seller’s market that has been driving home prices up and reducing inventory for the past two years. Rising mortgage rates unfortunately can make mortgage payments less affordable, but as a silver lining, the rate of housing price increases could go down as the market cools. (Note that it’s unlikely that real estate prices will drop unless mortgage rates continue to rise significantly, but rather, prices shouldn’t increase at the dramatic pace we’ve been seeing for the last couple of years.) If you’ve been struggling to buy a house either because of rising real estate prices or a fast seller’s market, you may see a transition to a buyer’s market as mortgage rates rise, which could make purchasing a home easier.
2. More Options to Choose From
As mortgage rates rise, it’s likely that houses will sit on the market for longer periods of time before being sold. This transition to a buyer’s market would not only help give buyers negotiating power, but would also give them more housing options to choose from. In a seller’s market, you may need to take what you can get, before it’s snatched up by some other competitive buyer. With rising mortgage rates and less buyers around, the competition could ease a bit, giving the remaining homebuyers more houses to consider.
3. Higher Savings Rates
Earlier in March, the Federal Reserve raised the federal funds rate by 0.25%. While this increase will contribute to the rising mortgage rates, it should also lead to an increase in the interest rates on savings products, such as Savings Accounts and Certificates of Deposits. This is because by putting your money into a savings account, you are essentially letting the bank borrow your money, and as a result, they pay you with interest. Homebuyers may benefit by putting funds into financial products and seeing an increase in their savings rates. If you’re not seeing an increase, it may be worth comparing your current account with other financial products offered by different banks.
Give It a Good Rating?
Overall, these “benefits” of higher mortgage rates are really just silver linings. If you’re considering purchasing a house, or wondering if you should refinance, act now in case mortgage rates rise even further. However, if you’re not quite ready to buy, you might see some long-term benefits through higher savings rates (which will be good for saving up a down payment for your new house), more housing options to choose from, and a decrease in the rate that real estate prices rise.
Getting a low mortgage rate is important because getting a rate that’s even just part of a percentage point lower could save you thousands of dollars over the life of your loan. This is why many people choose to refinance when mortgage rates are low (so if you have to get a mortgage while rates are still high, keep in mind that there may be an opportunity to refinance to a lower rate in the future). As with many markets, the mortgage market tends to fluctuate between high and low mortgage rates. Be sure you’re making the decision that’s best for your financial situation, whether that’s getting a low rate now or waiting for the future.
How Else Can I Save?
Mortgage interest is how lenders are paid for offering you an initial loan. While mortgage rates are affected by a variety of factors, typically lenders will be able to offer lower interest rates to individuals that they view as “safe” borrowers. By contrast, riskier borrowers will often only be able to qualify for a higher interest rate. This may be because the lender views them as having a higher chance of defaulting on their loan. Therefore, to help get a low rate, here are some steps you can take to make yourself an ideal borrowing candidate:
- Have a good Credit Score. A credit score is an indicator of your credit history, and having a high credit score means that you’ve been reliably making payments for a long time and have a healthy amount of credit. To prepare for getting a mortgage, make regular payments on all your accounts, and try to avoid borrowing more than half of your credit limit or applying for new credit. Maxing out your credit cards and getting new loans can decrease your credit score, so it’s best to avoid this before getting a mortgage. On the other hand, if you don’t have any credit or loan history, consider getting a credit card now so that you can build up a score before applying for a mortgage.
- Consider other loan options. Shorter term loans, such as 20-year mortgages or 15-year mortgages, are often considered less risky than traditional 30-year mortgages. As a result, these tend to have lower interest rates. Plus, by paying off your loan faster, you can save thousands in interest over the life of your loan. However, because you’re paying off your loan more quickly, monthly payments tend to be higher, so be sure you can afford a shorter-term loan.
- Save up for a Down Payment. If you can afford a higher down payment, this is often reflected in both a lower interest rate as well as a lower monthly payment. Putting at least 20% down is important to not have to pay for private mortgage insurance, which can be a cost at closing as well as an additional monthly expense. When you put more money down, lenders often view the loan as a safer investment.
- Purchase Mortgage Points. You can also purchase mortgage points to “buy down” your interest rate. Each point is typically 1% of the loan amount, but this initial closing cost can result in hundreds or thousands saved over the life of your loan by lowering your interest rate and your monthly payment.
- Get a Rate Lock. If you’re worried about interest rates rising, getting a rate lock can keep you at a specified interest rate for an additional fee. While a rate lock prevents your interest rate from rising, it can also prevent you from taking advantage of a lower rate if rates drop. Therefore, it may be best to get a rate lock with a float-down provision, which can allow you to lower your rate if the current market rates fall even further.
Ready for a Rate?
Another option for many homebuyers is down payment and closing cost assistance, which can provide either a grant or a loan to help cover the initial costs of homeownership. RateZip’s database of down payment assistance programs is a good place to start to see if there are any state or local programs that you may qualify for. Often these programs have income limits and other requirements, and are designed to make sure homes are affordable for homebuyers who need additional assistance. Check to see if these programs are available near you!
If you have to get a mortgage while rates are high, what are other ways that you can save? The best way to save on your mortgage is to shop around. Compare different lenders and quotes to find lower mortgage rates and lower monthly payments. Websites such as RateZip.com can help by letting you compare multiple lenders all in one place. If you’re ready to get a mortgage or refinance your current mortgage, start comparing mortgage rates at RateZip.com today.