Wednesday, February 9, 2022 / by Anne Rose
What Home Buyers Need to Know About Rising Interest Rates
With the prospect of rising interest rates on the horizon, home buyers who haven’t locked in a mortgage rate may find that the home of their dreams is more expensive.
“Rates remain extremely low by historical averages,” says Adam Slack, senior vice president of mortgage lending with Guaranteed Rate, “but as we move into 2022, we will continue to go further into a rising interest rate environment.”
“In a rising interest rate environment, it is important that buyers lock an interest rate in as soon as they have an accepted agreement or signed purchase contract,” advises Slack. “The rate lock is tied to the property address, so a rate can be locked in the same day the prospective buyer has a purchase contract.”
“To expedite the lock process,” he continues, “it is recommended once you find a property to go ahead and firm up the homeowners insurance including hazard, wind & hail and any flood insurance if applicable and have your policies
in hand once the contract comes in. This will not only allow your loan officer to come up with accurate estimates on your monthly payment while in contract negotiations but also have them saved in your file so once you have a signed contract very accurate rate lock options to the dollar can go out with actual taxes and insurance instead of estimates.”
Mortgage borrowers seek the lowest possible mortgage interest rates, which may create a sense of urgency when financial forecasts predict rising rates. While mortgage lenders manage their risk through the interest rates they charge, the lowest mortgage interest rates will continue to be available to borrowers with the highest credit worthiness. Rising interest rates will tighten the pool of home buyers who qualify for mortgages, especially those with the most favorable rates and terms.
Home buyers can protect themselves from rising interest rates, Slack emphasizes.
“Rates can be locked in for up to 90 days without being deemed an ‘extended rate lock,’” he says.
Even at 4%, mortgage rates are historically low, but compared to rates that have been in the 3’s, there's a significant difference between a 3% and 4% rate. A 1% difference in a mortgage rate can affect how much a home buyer will pay.
For example, a 1% difference in the mortgage rate on a $200,000 home with a $160,000 mortgage, will increase the monthly payment by almost $100. Over the term of a 30-year mortgage, the 1% high rate will result in approximately $30,000 more in interest over the life of the loan. For home buyers using low down payment loans, the monthly increase will be even greater.
“If the property is new construction and further than 90 days from completion you may want to consider one of the extended lock programs,” Slack advises. “Rates are higher for these programs but it will be beneficial to lock in with the slight adjustment in rate instead of “floating” an interest rate out waiting until dry wall is up in the current environment as opposed to previous years.”
“Rates remain extremely low by historical averages,” says Adam Slack, senior vice president of mortgage lending with Guaranteed Rate, “but as we move into 2022, we will continue to go further into a rising interest rate environment.”
What should home buyers do?
Because mortgage interest rates have a measurable long-term cost impact on home purchases, home buyers may feel the pressure to make their real estate investment decision sooner rather than later.“In a rising interest rate environment, it is important that buyers lock an interest rate in as soon as they have an accepted agreement or signed purchase contract,” advises Slack. “The rate lock is tied to the property address, so a rate can be locked in the same day the prospective buyer has a purchase contract.”
“To expedite the lock process,” he continues, “it is recommended once you find a property to go ahead and firm up the homeowners insurance including hazard, wind & hail and any flood insurance if applicable and have your policies
in hand once the contract comes in. This will not only allow your loan officer to come up with accurate estimates on your monthly payment while in contract negotiations but also have them saved in your file so once you have a signed contract very accurate rate lock options to the dollar can go out with actual taxes and insurance instead of estimates.” Mortgage borrowers seek the lowest possible mortgage interest rates, which may create a sense of urgency when financial forecasts predict rising rates. While mortgage lenders manage their risk through the interest rates they charge, the lowest mortgage interest rates will continue to be available to borrowers with the highest credit worthiness. Rising interest rates will tighten the pool of home buyers who qualify for mortgages, especially those with the most favorable rates and terms.
Home buyers can protect themselves from rising interest rates, Slack emphasizes.
“Rates can be locked in for up to 90 days without being deemed an ‘extended rate lock,’” he says.
Even at 4%, mortgage rates are historically low, but compared to rates that have been in the 3’s, there's a significant difference between a 3% and 4% rate. A 1% difference in a mortgage rate can affect how much a home buyer will pay.
For example, a 1% difference in the mortgage rate on a $200,000 home with a $160,000 mortgage, will increase the monthly payment by almost $100. Over the term of a 30-year mortgage, the 1% high rate will result in approximately $30,000 more in interest over the life of the loan. For home buyers using low down payment loans, the monthly increase will be even greater.
Buying New Construction in a Rising Interest Rate Scenario
For buyers of new construction homes with a completion window of greater than 90 days, additional steps should be taken to guard against imminent rate hikes.“If the property is new construction and further than 90 days from completion you may want to consider one of the extended lock programs,” Slack advises. “Rates are higher for these programs but it will be beneficial to lock in with the slight adjustment in rate instead of “floating” an interest rate out waiting until dry wall is up in the current environment as opposed to previous years.”
