Panicked mortgage borrowers can make for nerve-wracking encounters when interest rates climb.
Who can blame them?
Debt that outpaces the value of a home could make the most experienced mortgage borrowers go bald.
What an Interest Rate Rise Means for Mortgages
Variable rate mortgage borrowers are on a roller coaster ride when interest rates climb. Even fixed interest rate mortgage borrowers may be feeling the pain when loans come due for renewal. Low introductory rates for mortgages can backfire too if interest rates climb just as that rate expires.
Arm yourself with these facts when interest rates climb.
Three ways higher interest rates affect mortgages:
- Homes are more expensive.
First time home buyers and mortgage borrowers forced to move can be hit hardest when interest rates climb. How much buyers can afford for a home stays static, but what it costs to buy real estate may go way up. Looking at lower-priced properties, downsizing expectations, or delaying purchases may be the best strategies for stressed mortgage borrowers. Figure out how inflation affects spending power.
- The cost of borrowed money increases.
Mortgage borrowers might be able to limit debts and how long they amortize a home, but what they can’t control is what it costs to service a loan. Breaking it down, $475,000 borrowed over 25 years on a five-year fixed term at 5.15% is $646.60 weekly or $168,063.70 for principal and interest. That same amount at 2.75% is $504.48 weekly or $131,165.70 for principal and interest. Calculate the effect of rising interest rates on a mortgage.
- Inflation shrinks demand and supply.
Who doesn’t clamp down on spending during inflation? Cautious mortgage borrowers retreat when interest rates climb. Prospective sellers pull their home off the MLS to outwait the slowdown in buyer demand. Disposable income shrinks if wages can’t keep up.
Who Rising Interest Rates Benefit
Savers gain when interest rates climb. Interest rates on certificates of deposit (CDs), savings, and money market accounts go up in an inflation. Rising interest rates cool overheated housing markets, making homes more affordable for committed homebuyers who can bear up under the higher borrowing costs.
But mortgage borrowers can benefit in other ways when interest rates climb. inflation-driven wage increases put extra cash in borrowers’ pockets that can make its way into the mortgage market as lump sum payments. Inflation also devalues currency, and that means mortgage borrowers can pay back a lender with cash that is worth less than when they applied for their mortgage.
Lenders don’t lose out altogether. Inflationary pressures can drive consumers to apply for more credit and longer repayment terms. All that credit comes at higher interest rates.
Best Interest Rates for Mortgage Borrowers During Inflation
What is the best term to get when interest rates are high? That’s a decision best left to how risk adverse mortgage borrowers are.
- Fixed-rate mortgages and five-year rates can help mortgage borrowers on a strict budget ride out inflation.
- Fixed-rate mortgages stay steady and follow new bond yields, giving mortgage borrowers a break from rises in interest rates.
- Variable rate mortgage borrowers benefit the most if interest rates drop. Their total debt servicing over time is generally lower. If they can stand the unpredictability, they could be the biggest winners.
Advice on managing your money when interest rates rise.
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