Mortgage Rates Are Rising: Do Home Buyers Need to Act Fast?

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During the past month, mortgage rates have risen sharply, moving from about 3.40 percent to their current level of 3.90 percent, according to Bankrate.

Whether you own a home and already have a mortgage or are thinking about taking on new mortgage debt with a home purchase, it's essential to avoid the mistakes that many people make when rates abruptly rise. In particular, the best way to keep from making an impulsive move that you'll later regret is to make sure you don't react emotionally to rate changes.

What Higher Rates Make You Want to Do

Even with a relatively small rise in interest rates, would-be homebuyers are already falling prey to the conflicting emotional currents that affect a home-purchase decision.

On one hand, some would-be buyers look at the higher rates and erroneously conclude that a home purchase is now out of reach. On the other hand, some experts believe that the rise in rates could well lead to more home-buying activity, as buyers rush to lock in rates before they increase further.

With respect to the affordability question, the numbers show that the impact of rising rates on monthly payments isn't as great as you might think.

Using a standard mortgage calculator, you'll find that on a 30-year mortgage for $200,000, the recent rise in rates only increases your monthly payment by about 6 percent, from $887 to $943. And while that might keep a small fraction of would-be homebuyers on the margins from being able to buy, for many, coming up with an extra $56 per month to put toward a mortgage payment isn't impossible.

When it comes to accelerating home purchases, the latest data from the Mortgage Bankers Association support the fact that home buyers do indeed feel the pressure to move forward before rates rise further. Although applications for refinanced mortgages fell 15 percent as of the week ending May 24, new-purchase mortgage applications actually rose 3 percent and hit a three-year high, indicating more buying activity. Unfortunately, impatience takes away a key negotiating advantage that buyers have in choosing a home and getting the best bargain they can.

What You Should Do Instead

Letting emotions overwhelm your rational judgment is never the right move when a major purchase is involved. Here are a few things you can do now that will help you avoid that pitfall:
  • If you're in the market for a new home, contact lenders now and figure out which one will give you the best financing package. Once you've picked one, go through the mortgage pre-approval process to find out how much you can afford to spend. But don't stop there. Also ask your lender to give you a sense of how that pre-approval amount will change with rising rates. That way, you can nudge your targeted home-purchase price downward and shop without fear that stretching your budget to the limit could make a purchase collapse from lack of financing if rates rise even the smallest amount from their current levels.
  • Similarly, if you're looking to refinance, have your preferred lender go through a series of different scenarios to find out what the impact will be if rates rise further. If a refi would still make sense even if rates rise higher from here, then you have more flexibility to hold out for a short-term decline. On the other hand, if waiting puts your entire refinancing at risk by making it economically infeasible with the tiniest of further rate increases, then you'll know what's at stake and can act quickly with greater conviction.
Finally, bear in mind that even after their recent move upward, mortgage rates are still very low by historical standards. Years from now, when interest rates are closer to more normal levels, you likely won't be dwelling on the fact that you had to pay half a percent more than the best rate you could have swung; you'll just know you got a good deal.


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Faith Yakatate

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December 16 2013 at 3:04 AM Report abuse +1 rate up rate down Reply
althea.marti

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June 04 2013 at 4:30 PM Report abuse rate up rate down Reply
minniebannister

A month or two ago they were saying that rates wouldn't rise for another year or so. You never know what to believe anymore.

June 04 2013 at 7:22 AM Report abuse +1 rate up rate down Reply
michael

Interest rates SHOULD increase. These days of banks giving .1% interest on savings etc..is killing this economy. People have no choice but to put their hard earned $$ into the stock market...which is nothing more than legalized gambling without even knowing the odds. Mortgage rates of 6-7% would help the economy tremendously by allowing people to get a decent interest rate on saviongs and also loans given at fair rates also. Look back in history. This country's best years, mortgage interest rates were in the 5-8% range.

June 03 2013 at 5:57 PM Report abuse +1 rate up rate down Reply
vlady1000

From an investor point of view that buys and holds them for a very, very long time. I will stop trying to buy any more when rates hit 4.5%, unless a great price comes along, which I doubt (in my area). But then, I really do not need any more, so this may be a blessing (less work for me).

June 03 2013 at 5:15 PM Report abuse -1 rate up rate down Reply
krzyston

An economist's guess is liable to be as good as anybody else's...Will Rogers
other Business quotes: http://alexkrzyston.thoughts.com/posts/alex-krzyston-the-us-economy--2

June 03 2013 at 4:40 PM Report abuse rate up rate down Reply
donut999

Considering 3.375 and 3.875% are still wonderful rates, it should not be much of an issue. Rates will never get lower than they have been for the first half of this year.

If you have equity which spells downpayment, can exit your existing home for a reasonable price, and plan to hang on to the next dream house for at least 7-10 years, it is still time to buy.

The word soaring needs to be replaced with the words improving steadily when referring to the housing market or mortgage rates.

June 03 2013 at 3:38 PM Report abuse rate up rate down Reply
badguysnightmare

Higher mortgage rates will force down the current soaring housing prices....people who bought just before the mortgage rate hikes will be the ones stuck holding the bag with deflating prices. They will be stuck once again with a high priced house that wont be worth the market value once the higher rates force the prices down.

June 03 2013 at 3:32 PM Report abuse -1 rate up rate down Reply
shurtcircuit

The banks are running a fraud scam just like they operate the HAMP SCAM. Fraud Fraud fraud government approved. Beware

June 03 2013 at 2:42 PM Report abuse +1 rate up rate down Reply
the aol experien

NO, DON'T BUY NOW!!!! This is just a manipulation by the FED to help the banks sell their HUGE balance of foreclosed properties. Believe me if the economy is at 2 - 2.5 in sustained economy, you will simply be helping the banks by buying these properties. Yes, it's true the government and the fed care nothing about us, they only want to protect themselves.

June 03 2013 at 11:04 AM Report abuse +3 rate up rate down Reply