Rising interest rates can lead to problems for homeowners.

One of the biggest factors that have kept the mortgage crisis from escalating even higher has been that home interest rates have remained low. However, inflationary fears are now threatening to undo this progress and interest rates are rising. For those homeowners holding an adjustable rate mortgage home loan, an increase in mortgage payments could add to the pain of higher food and energy prices. For would-be home buyers, an increase in interest rates could make a home purchase unobtainable. How does a rise in interest rates affect your monthly mortgage payment?  

A .25% Change in Interest Can Make a Big Difference in Mortgage Payments
Obviously, the affect of an increase or decrease in mortgage interest rates depends upon the amount of the loan. When you take your mortgage calculator and look at a $300,000 thirty year fixed rate mortgage of 6%, you find that your payment for principle and interest is $1,799 per month. An increase in interest to 6.25%, makes the mortgage payment on the same loan go to $1,847 which is an additional $48 dollars per month. On a $600,000 loan amount the mortgage calculator shows a big difference in monthly mortgage expense:  

            $600,000 @ 6%      = $3,597
            $600,000 @ 6.25% = $3,694  

That addition of nearly $100 per month can be huge for those struggling to make ends meet or trying to qualify for a new home loan--it takes about a $300 per month income increase to offset a $100 increase in monthly expenses for qualifying purposes.  Those whose financial plans include a refinance may have to add a backup strategy to avoid becoming "house poor" in the future if adjustable rates rise and they can't qualify for a fixed rate loan.  

Protect Your Mortgage and Your Future
Recently the interest rate on many adjustable rate mortgages actually went down which lowered homeowner's monthly mortgage payments. This is because the Federal Reserve lowered interest rates and adjustable rates often shadow Fed rate changes pretty closely. Interest rates, both short and long-term are expected to move up given current economic expectations. If you do want an adjustable rate mortgage loan, look at one with a stable index such as the CMT or the COSI and one that will not adjust for 5 years or more to give you time to maneuver into a fixed rate mortgage if interest rates and market conditions are good. Also, you may want to consider refinancing your adjustable rate mortgage into a fixed rate note before interest rates move higher. For those who have jumbo mortgages over $417,000, now may be the time to refinance as the conforming loan limits have been raised and will stay in effect until the end of this year. Remember, before you do anything, talk to a trusted loan officer to see what options are available to you.

Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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