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How to Handle Higher Mortgage Rates

by Kevin McKinley - November 27th, 2016

Posted Under: real estate

One of the lesser-discussed post-election events we’ve witnessed is a slight uptick in mortgage rates. The reasons for it may include concerns over a looming hike in interest rates by the Federal Reserve, or a shift in investor preference from bonds to stocks.

Regardless of why it’s happening, several types of current and prospective homeowners may be affected by higher mortgage rates. Here’s how to handle it if you fall into one of those groups.

Current homeowners

If you plan to stay in your home for the foreseeable future, have either no mortgage or one with a fixed rate at 4% or lower, and have plenty of cash and no need to borrow in the future, you can relax.

You don’t need to do anything differently, other than perhaps only make the minimum monthly payment required, and save any extra cash for future purchases or investments.

But if you currently have a mortgage with a rate greater than 4%, and/or have an adjustable rate mortgage, and/or might need a big chunk of money in the coming years, you may want to get thee to a lender as soon as possible.

Assuming your credit is in decent shape, you will obtain a new fixed-rate 30 year mortgage for 80% of the home’s value. If you’re able to get any extra cash out in that scenario, use the proceeds to pay for upcoming larger expenses (such as home improvement or higher education costs), to boost up your retirement savings, or just sock away in a certificate of deposit for a rainy day.

Prospective buyers

An increase in mortgage rates can be an additional source of anxiety for those who are thinking of buying their first (or next) home. But a couple of things to think about before you push the proverbial panic button.

First, unless rates rise substantially before you buy, you’re unlikely to pay a whole lot more per month than you would have if you were to get a mortgage today.

For instance, let’s say you’re looking to buy a $200,000 home, with a 20% down payment ($40,000)

Your mortgage would be $160,000, and the monthly payment on a 30-year fixed-rate 3.75% loan for that amount would be about $741.

If the rate were instead 4.25%, the payment is $787—less than forty bucks more per month (and if that extra amount creates a financial hardship for you, you’re probably not ready to buy a house just yet).

The other silver lining of rising mortgage rates is that it may make the purchase price of your would-be home a little less expensive. If rising rates cause that $200,000 home to decline in price to $190,000 and you still make a $40,000 down payment, your mortgage amount would be $150,000. At the 30-year 4.25% loan, your monthly payment then would be about $738—virtually the same as if you bought the house for $200,000 and obtained a 3.75% mortgage.

Soon-to-be sellers

That potential price decline means rising mortgage rates can be just as nerve-wracking to those selling a home as it is to buyers. If you’re thinking about selling a home and need to get the highest price possible, it may be better to sell it sooner rather than later—especially if you’re going to be buying another place with a price that will rise and fall correspondingly with your current house.

One way to help ensure that your place sells is to get any needed work done on it before you sell it. And unless you have lots extra money laying around, the best way to do that is to use your current home equity to pay for the upgrades.

So next week we will discuss the advantages and disadvantages of the various methods of borrowing against your home equity. In the meantime, potential borrowers should review their credit report data for free at annualcreditreport.com, and perhaps pay a small fee to find your credit score at myfico.com.