If you are in the market for a new home or you are interested in starting your search, then you are probably wondering how interest rates are changing and what that means for new mortgages. At its July meeting, the Federal Reserve lowered interest rates by 25 basis points from 2.25 percent to just 2 percent. So, what does this mean?
Long-Term Fixed Mortgages
Before we continue, it is important to remember that federal fund rates don’t directly affect long-term fixed interest mortgage rates. However, the new mortgage rates today are low even though they were predicted to be much higher in 2019.
Variable Rate Loans
With the change and reduction in interest rates, borrowers interested in variable rate loans may end up with more favorable conditions. Interest rates for home equity lines of credit and adjustable-rate mortgages are connected to short-term rates (the prime rate), and this moves in tandem with the federal funds rate.
A drop in this rate also means a drop in variable rates. However, these loans don’t typically adjust themselves until several years later, so a borrower may have to wait a bit longer to see their savings due to the changing interest rates.
Higher interest rates make mortgages less affordable on a month to month basis, that’s a given. This can, in turn, cause more people to sell their homes and lower prices in order to attract more prospective buyers. On the other hand, lower interest rates are offering potential homebuyers more in savings. Both side of the coin can be interesting if you’re a buyer.
Interest Rates and Mortgages
Buying a home is a significant investment and a large financial transaction. So, you are going to want to compare lenders, mortgage rates, and other options available to you before purchasing a new home. When researching these things, it is important that you understand how the interest accrues and what that means for your mortgage payments.
Amortization formulas are used in order to create a payment schedule for the home. Each month, you are paying back a portion of the principal the amount of money you borrowed for the home plus any interest that has been accrued for that month. Therefore, the longer you take to pay off your mortgage, the more interest you will end up paying.
What to Do as a Borrower
If you are a homebuyer that is interested in a fixed-rate mortgage or you have a home that you want to refinance, then you should consider taking advantage of today’s lower interest rates. Before doing so, you should decide if you can afford the home you are interested in purchasing. To do this, consider what your down payment amount will be and compare that with the current mortgage interest rates. The fastest way to determine affordability is by arranging a consultation with a mortgage broker such as Natalie Salins with Movement Mortgage.
Since the rates today are approximately 2 percent lower than the historical average, it may be beneficial to buy now instead of waiting for even lower rates. Waiting could end up being a missed opportunity.
If you are interested in an area that seems to be up and coming and the homes are affordable, you should seriously consider the benefits of purchasing a home now while the interest rates are lower, and the mortgages are much more affordable.
Don’t wait for those rates to go even lower and risk missing out on your dream home opportunity. Examine your current financial standing today, decide what you can comfortably afford, and make your homeownership dreams come true while the rates and factors are favorable for homebuyers.