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.