This is a discussion about increased interest rates.
Increased interest rates are a great thing when you’ve got a savings account — the same amount of money in the bank will earn more when the interest rate is higher. But a high interest rate isn’t good when you’re borrowing money for a mortgage on that home in Brookhaven or the condo in Decatur. Even a small bump in the rate can mean you have to pay hundreds more each year and for the life of the loan.
What to expect
The days of 3-percent increased interest rates for mortgages are probably gone for a long time. Rising rates are the result of the Federal Reserve reducing the number of bonds it purchases each month, according to Bankrate. Interest rate forecasts for the coming year see rates climbing to about 5 percent by summertime.
Less home for the money
Although the cost of a home might not change, buyers can’t afford quite as much when the rates increase. A higher interest rate means a higher monthly payment for the buyer, even if the cost of the house remains the same.
For example, if you bought a $250,000 house in Atlanta and put down 20 percent when the interest rate was 4 percent over 30 years, your monthly payment would be $1,098.06. If the rate jumped to 4.5 percent by the time you were ready to buy, your monthly payment would be $1,165.38, or about $807 more annually.
Increased interest rates also affect people who are trying to sell their homes. They might find that they have to reduce the cost of their houses to attract the same type of buyers as when rates were lower. When it’s time for sellers to buy new homes, they will be in the same boat and will experience higher monthly payments. That means they might not be able to afford as spacious or expensive a house as they may have gotten previously.
Get off the fence
One potential benefit of the rate increase in 2014 is that hesitant buyers might finally make the decision to buy before rates rise too high. Although 5-percent rates are higher than the 3-percent rates seen just a few months ago, they are still nowhere near the average rates for mortgages over the past 30 years, which are typically closer to 9 percent. Rates between 4 percent and 5 percent are still historically low, and they can be enough to push a buyer into a home.
For the moment, some types of mortgages will offer lower rates than others. Buyers looking to stay in a home for the longer term are usually better off choosing a fixed-rate mortgage, as the rate will remain the same for the life of the loan. But, for buyers who plan on moving again within five or 10 years, an adjustable-rate mortgage currently offers a slightly better rate, at least until the rate adjusts or the buyer sells the house.
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