How do you plan for this and what will really happen? The reality is no one really knows where interest rates will go but the Mortgage Bankers Association does predict that rates will be at about 5% by the end of 2014. In 2015, rates are predicted to increase to 5.3% or 5.5%. As rates increase, your purchasing power will decrease so it is something to be aware of.
Home prices have increased over the past year and as home values continue to increase, your purchasing power will decrease that much more. There are a few things you can do to help you get the home you want at a mortgage payment that you can afford. First of all, make sure you are qualified for the home prices that you are looking at. Talk to you lender about what you can afford and what the payment will be.
Once you know what you can afford, the following things can help you get the home you want at the right payment!
-Buy or refinance now! As rates and home prices go up, you may find yourself in a price point that won't let you get the house you want. It's amazing how much interest rates can affect your payment. A $200,000 30 year mortgage at 4.5% will be a principal and interest payment of $1013. At 5.0% that payment increases to $1073 – that's an extra $60/month! Over a year it's an extra $727, imagine over 30 years – it's over $21,800!!
-Save for larger down payment. The more money you can put down, the lower your payment. Mortgage insurance will drop and if you put 20% down, the mortgage insurance goes away. The interest rate may be lower if you can put 20% down.
-Improve your credit. The higher your credit score, the lower your interest rate. Fannie Mae and Freddie Mac have add-on's for credit scores under 740. The lower your score, the higher the interest rate. If you know your score is under 700, work to improve your score and that will help lower your interest rate.
-Think about a shorter term mortgage. If you can afford a 15 or 20 year mortgage, your interest rate will be slightly lower. Your payment will be higher, but you will save thousands of dollars in interest if you can afford the higher payments.
If you know that you are thinking about buying a home in the next few months or maybe in the next year, you may want to look sooner than later. Interest rates are great right now – in fact they are about as low as they have been since November 2013. Home prices are definitely increasing and we know that there are a lot of multiple offers depending on where you are looking and what the home price is. All of that can make it more difficult to find what you want, but there are homes out there and it is a great time to buy now! Talk to your realtor and your loan officer and decide if now is the best time for you!