Changing home-buying plans due to rising interest rates?

March 20th, 2013

If you have been planning on buying a home or refinancing a mortgage, you may want to reach for a mortgage calculator -- one of your key assumptions may have just changed.

According to mortgage finance company Freddie Mac, on March 14, 30-year mortgage rates reached their highest level since late August of last year. While still low by historical standards, mortgage rates have now risen enough that they may force some home buyers and owners to re-work their mortgage calculations.

The recent rise in rates

As of March 14, average 30-year mortgage rates were at 3.63 percent, their highest level since reaching 3.66 percent on August 23, 2012. Thirty-year rates have now risen by more than 30 basis points since hitting bottom at 3.31 percent on November 21 of last year.

15-year rates have also risen, but not by as much. These rates averaged 2.79 percent on March 14, up just 16 basis points from their November 21 low.

Three possible directions

Unless you have an extra store of cash to put down on a house, the recent rise in rates leaves would-be home buyers with three possible directions to take:

  1. Wait for mortgage rates to go back down. Simply waiting could be a risky strategy though -- recent mortgage rates were lower than they had ever been previously, and that may prove to be a once-in-a-lifetime occurrence. In addition, if rates continue to rise, waiting would only make things worse.
  2. Save up for a larger down payment. Because this will take time, it involves the same risks described above, but at least building a larger down payment is a more constructive solution because it should shorten the wait.
  3. Lower your home price target. Every local market is different, but this would be a good time to think about whether you could live with what you'd have to give up to get your price target back into an affordable range.

In essence, the three options above involve juggling three variables: mortgage rates, the size of your down payment, and the cost of the property. Using a mortgage calculator, you can try adjusting each of those three variables, or any combination of them. Your goal should be to find the most probable combination of variables which yields a result you can afford.

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