Anyone who’s in the market to buy a new home has likely been eying rising mortgage rates with some trepidation. Rates have been on the rise and it’s given some potential buyers a reason to pause their search altogether. This could be an occasion to assess the decision to buy a home while taking into consideration some new factors. Rising interest rates can impact many aspects of the journey to home ownership from the prices of homes to the mortgage individuals qualify for, so here are some factors that homebuyers may want to consider as they plan their next move
1. Home prices may not decrease right away
As mortgage rates rise, the price of borrowing becomes more expensive: it costs more (per month and overall) to borrow the same amount of money. As a result, more people may find themselves unable or unwilling to take on as large of a mortgage; this may reduce demand for homes and consequently may eventually reduce home prices. However, demand is only one factor when it comes to home prices, so it’s not certain that prices will actually fall.
2. Borrowers may not qualify for the same loan amounts
Lenders determine a potential buyer’s eligibility based on factors such as their income, credit history, and current debt-to-income ratio (DTI). “Most lenders like to keep borrowers’ monthly debt payments below a certain percentage of income,” said Northwestern Mutual Growth and Development Director Dexter Wyckoff. “With higher interest rates, borrowers will see higher monthly payments to borrow the same amount of money, and thus a higher DTI associated with the same home prices. So, as a result of higher interest rates, borrowers may be approved for a smaller mortgage than they originally planned for and might have to look for a lower-priced home.”
3. Higher monthly payments could impact monthly budgets
A higher monthly payment may mean cuts to other goals or less disposable income. Even if they can qualify for higher loan amounts, homebuyers will need to consider if they are in a position to accommodate higher monthly payments, or willing to make a tradeoff. Inflation is still a concern, and a higher monthly mortgage payment may pose an issue for some if the prices of groceries or other consumer goods climb too.
4. Waiting can be a gamble
Potential homeowners may be tempted to wait out this period hoping for decreased mortgage rates, but it’s important to know that there are no guarantees. Waiting for mortgage rates or home prices to decline may not always have the desired outcome: it may happen soon or it may be years before rates start going down again. Mortgage rates can fluctuate and cause uncertainty.
5. Consider purchase protection
Buying a home is a big purchase that typically comes with years of required payments. “Many homebuyers consider purchase protection in the form of life insurance,” said Wyckoff. “The policy’s death benefit would offer loved ones a way to help pay off the mortgage and keep the home even if the buyer passed away unexpectedly.” Purchasing a home for the first time in a tough market can be challenging. Thoughtfully considering the options and staying informed is the key to confidently purchasing a home.
Source: Northwestern Mutual
Contact: Don Klein, 1-800-323-7033
Name: Don Klein
Job Title: Assistant Director Field & National Grassroots Public Relations