Mortgage Rates 20 year high

Mortgage Rates 20 year high

You can’t control mortgage rates, but there is plenty you can control about your home purchase!

Are you like me feeling like you missed the boat on buying a home when mortgage rates were lower?   Well, here is a little history lesson on mortgage rates that hopefully makes you feel better!  In August, mortgage rates hit a 20 year high, but rates are not at their highest.  In 1981 mortgage rates were 18.63%, the all-time high (ouch)!  The all-time low was 2.65% in 2021.  The average 30-year fixed rate mortgage since 1971 is 7.74%, so we are just below the average right now with current mortgage rates at 7.23%.  (Data from Freddie Mac)

Don’t let current interest rates stop you!  If rates go down, you can refinance and if interest rates go up you will be happy that you took action.  My point is you cannot control where interest rates are at any given time, so focus on the things that are in your control that can help you lower your cost of buying a home.

If you are ready and can afford the home you want, then here are some things to think about before you pull the trigger.

Down payment – If you can put a 20% down payment on the house you are buying, you will be able to save the cost of private mortgage insurance (PMI).  Lenders will require PMI insurance if your down payment is lower than 20%, because they will consider the loan as riskier.  The cost of PMI is typically between 0.5%-2.25% of the mortgage loan amount and it is added to your monthly mortgage payment.

Idea: Perhaps you delay your purchase or save aggressively to have a 20% down payment and avoid PMI.  But if rates are rising then delaying your purchase could wipe out any savings of having a higher down payment.

Credit score – Your credit score directly impacts the mortgage rate that will be available to you.  Having a credit score in the 700’s is where you can expect to be eligible for the lowest mortgage rate.  Having a credit score below 700 can cost you thousands of dollars in additional interest payments.

Idea: Improve your credit score before getting a mortgage. Make payments on rent, loans and credit cards on time, keep your spending to below 30% of your credit limit, pay off balances to free up credit and check your credit report for errors. Click here for articles dedicated on this topic.

Discount points – You can pay a lump sum of money to your lender to trim the interest rate on your loan.  This lump sum is to the lender, so you need to have additional savings beyond your down payment to take advantage of this.  Each point costs 1% of the mortgage amount and reduces the interest rate by 0.25%.

Idea:  If you plan on staying in the home you are buying for a long time, then this might make sense.  But you also could potentially refinance your mortgage if interest rates go down and discount points would then be less valuable.

Loan Term – You can choose the number of years you have to pay off your mortgage.  The term can impact your interest rate and your monthly payment.  A 30-year mortgage will have a higher interest rate than a 15-year mortgage, but a 15-year mortgage will have a higher monthly payment than a 30-year mortgage.

Idea:  Choosing a shorter term for your mortgage can save you thousands of dollars, so if you can work the higher monthly payment into your budget this is a great way to save money over the long run.

Loan Type – There are fixed-rate mortgages and adjustable-rate mortgages.  A fixed-rate mortgage has an interest rate that is permanent for the life of the loan.  An adjustable-rate mortgage offers a very low rate for a set number of years at the start of the loan then the rate becomes variable for the rest of the loan term.

Idea:  The adjustable-rate could be the right choice if you know you will sell your home before the variable rate kicks in, or interest rates are going to be lower when the variable rate starts.

Whether you are a first-time home buyer, buying a vacation home or an investment property, I wish you happy house hunting!  Click here to access all the resources we have on home buying. If you need help planning give us a call…planning is what we do best!

Vida Jatulis
Vida Jatulis

Vida joined our MainStreet Financial Planning team in 2022. She utilizes her life and work experiences to help clients develop an action plan for a vibrant and healthy financial life. Vida is a CERTIFIED FINANCIAL PLANNER™ professional with a Master of Science degree in Investments and over 15 years of experience as a Financial Planner, Wealth Advisor, Pension Consultant, Trust Officer, and Portfolio Manager. In addition, Vida has personal experience with struggling and succeeding to reach milestones such as purchasing a home, putting kids through private school, saving for college, achieving debt free status, saving for retirement, raising a family on a single income and much more.

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