If you are still unsure whether it is a good time to start looking for that new home, you should consider how expected increases in the interest rate you pay on mortgages will make it harder for you to find your dream home next year.
Most homebuyers rely on a mortgage to purchase their home. That means the cost of that home will be impacted by the interest rate your lender applies. While interest rates have hovered at record lows for more than a year in the wake of the global pandemic, there are clear signs those rates will increase in the coming months. That means you will pay your lender more for that mortgage and that means you have less money to put into that new home.
Now is the time to take seriously that home search you may have put off in recent months. If you do, you can avoid some of the larger increases in interest rates expected next year, and use more of your money to buy the house you always wanted. Each day, new listings are updated for St Augustine real estate Florida. Here are some of the reasons why you should act now to avoid paying more than you should finance that new home.
How the Fed triggers higher interest rates on mortgages
In December, the Federal Reserve’s actions caused a ripple effect that began to impact interest rates on mortgages. While the Fed doesn’t set those rates, when it speaks the market listens and that typically affects interest rates.
When the global pandemic surfaced in the Spring of 2020, the Fed took steps to help protect the economy. As a result, interest rates dropped, including mortgage rates. That began a more than year-long period of low-interest rates for homebuyers. In 2021, as national economic news worsened with continued outbreaks of COVID-19 and increasing inflation, the Fed began pulling back on some of the measures taken in 2020 to help the economy.
The idea is if the Fed can reduce its stimulus measures used to kickstart the economy during the pandemic, that will help limit or reduce inflation and further cool an otherwise overheated national economy spurred by billions in government relief programs and stifled by supply chain shortages unable to meet consumer demand.
After meeting for two days in December, the Fed announced it was speeding up the pullback promised from pandemic-induced stimulus and predicted several increases in the interest rate banks are charged in 2022. When that happens, banks turn around and increase their own interest rates for borrowers, including mortgage rates.
What it all means to the cost of a home mortgage
When banks increase the amount of money they charge borrowers in interest, that means a monthly mortgage payment increases. Here’s why that matters to how much you can borrow for that new home.
Before you begin your search for a new home, you should meet with a lender to determine how much you can borrow. That decision is made based on a number of factors, such as your income, your debt and your credit history. A key measure that lenders use when they consider giving borrowers the mortgage they need to buy a home is how much their monthly expenses are compared to their income. This is known as their monthly debt to income ratio.
When that expense ratio is calculated, the interest rate on a mortgage is considered along with all the other debts a borrower may have, such as a car loan, student loans and real estate taxes. When interest rates on real estate mortgages are low, that means a borrower has more monthly income to dedicate to the principal on a mortgage; and when interest rates are high, a borrower has less income to pay on principal.
That translates to higher interest rates forcing homebuyers to reduce the maximum amount they can afford for a new home. For example, if your income with lower interest rates meant your lender could qualify you to buy a $300,000 home, higher interest rates could reduce that maximum amount to $275,000.
What the experts expect when it comes to interest rates in 2022
If the Fed follows through as expected with its proposed actions in 2022, experts believe interest rates for real estate mortgages will increase significantly. That’s bad news for homebuyers.
While mortgage rates hovered around 3% in early 2021, some economists believe those rates could top 4% in 2022. The rates are expected to begin increasing in the spring and continue through the end of 2022, when interest rates on mortgages could pass 4%. Interest rates began to inch up slowly weeks after the Fed announced the likely actions in late 2021.
A similar trend in interest rates occurred in 2013 when the Fed took a similar approach to pull back on economic stimulus measures used after the Great Recession in 2009. Before that pullback was announced in May 2013, interest rates on mortgages fell around 3.25%, in the neighborhood of where rates were in December before the most recent pullback announcement, according to Freddie Mac data. Fifteen months after the Fed announced the 2013 pullback, interest rates jumped to nearly 4.5%, a sizable increase in the cost of borrowing money to buy a home.
What you can do now to avoid the higher interest rates
All of this means you have time to make that move into the new home you want. First, you will need an expert source in St. Augustine like SRN Real Estate Pros to find the property that is right for you. You will need a reliable listing of real estate for sale available in your area to narrow down your options. If you are able to identify a property that you want to buy, you can start the process of applying for a mortgage that can lock in lower interest rates before those increases begin.
Your expert real estate listing service also can give you an idea of how much you can sell your existing home for and provide a place to advertise it once you are ready to put it on the market. Act now to avoid the impact higher interest rates are expected to have on real estate prices.