What Can a Rate Increase Affect?
Construction Lenders
An interest rate increase can cause construction lenders to find it harder when it comes to underwriting. Since construction loans tend to run 18 months or longer, it is important that the lender ensure they are covering any interest rate hikes during that 18-month period.
Home Mortgages
Increasing interest rates will affect current homeowners as well as those looking to purchase a home. Higher interest rates will cause:
Refinancing Originations Will Drop
With interest rates higher, refinancing options will be less appealing. Even those who are looking to find a way to take some money against the equity in the home, may look for additional options or wait if their current interest rates are low.
Access to Credit Will Widen
When there is a decline in new mortgages or mortgage refinance, banks will need to widen their net for those they lend to be able to meet the needs. To get additional loans, the banks may begin to allow financing to those who have less than perfect credit and may typically not have qualified for a loan when interest rates were low.
The Cost of Homes Will Rise
The costs of homes will increase due to demand, higher incomes, higher costs of labor and materials, and prices that come along with inflation and an increase in interest rates.
Homeowner Mobility Will Lessen
Higher interest rates can lead to decreased mobility among homeowners as many will be less likely to trade up homes or look for new desired areas as their rate, and overall interest would be increased. Therefore they will stay in their mortgages for a longer duration which affects mortgage trading, and in turn, pushes interest rates even higher.
Crunching the Numbers: How an Increase in Rates Could Affect Your Loan
Depending on your loan, and whether you are buying a home, refinancing a home, or have an adjustable-rate mortgage, your overall interest and monthly payment could be affected in a variety of ways.
Adjustable or Variable Rate Mortgages
An adjustable or variable rate mortgage will start with a fixed period for a set timeframe, generally three to five years, where the interest rate will stay the same. After this fixed period, the interest rate of the loan will fluctuate with current interest rates. With the new anticipated rate increase, an adjustable mortgage could see as much as a half-a-point increase.
For example, a $150,000 mortgage with an initial rate of 3.5% and a five-year fixed period, would pay up to an additional $70,000 in interest over the life of the loan if interest rates continued to be higher for the duration, which would also increase the monthly payment over $313 per month.
Fixed Rate Loans
Homeowners looking to refinance or new buyers looking to purchase a home during the current period of higher interest rates can expect to pay a significant amount of overall interest in the duration of their loan as well as higher monthly payments.
For example, if you take a $100,000, 30-year fixed-term loan out when interest rates are at their expected high of at least 4.5%, you will be paying over $43,000 in overall interest than you would have paid when the interest rates were at an all-time low of 2.3% around 2016, which would also be an additional $122 more on your monthly mortgage payment.
FHA Loans
High-interest rates can affect borrowers' ability to get loans through an FHA program because of the increase in monthly payments they create. Those who are looking for an FHA loan may have a low down payment, less-than-perfect credit, or lower income. Those borrowing a higher loan to value rates or those with lower credit scores will be on the higher end of interest rates. If interest rates are increased overall, it may be difficult for loan applicants to meet the necessary debt-to-income ratio that is required due to the increase in monthly payments. Read more about FHA loans here.
In the end, the truth about interest rate increases is that they can affect borrowers, lenders, and particularly homeowners who are looking to purchase a home or refinance their current home mortgages. If you would like to learn more about interest rates or want to find the best course of action for your mortgage, contact Rocky Mountain Credit Union today for more information.
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