|How higher mortgage rates affect payments for a home
Are you purchasing a home or refinancing a home loan? If the interest rate is not locked, be prepared to watch the market very closely with your mortgage company.
On closing escrow on the shorter term, consider moving into locking status, as rates are volatile. For the longer term, take the position of floating, as strong economic indicators point to improving (better) rates.
For everyone else looking to close escrow faster:
• Call your lender ASAP.
• Can you lock your interest rate immediately?
• If you can’t lock, when can you lock? (Some companies prefer to lock your interest rate upon having an appraisal in hand (if required as a condition of the loan).
As a consumer, it is vitally important to get answers to these questions because it will give you a better idea of when you can determine the best appropriate time for locking your interest rate. (Remember: It is an $8.25 payment change for every .125 percent in every $100,000 borrowed.) Changes in rate affect the mortgage payment – a function of the amount borrowed.
Take a $300,000 loan using a traditional 30-year fixed-rate conventional mortgage. By working the numbers, you’ll see a $300,000 loan amount’s payment would change by $24.75 per month for every .125 difference in rate.
Put another way, the monthly difference between 3.75 percent and 4.0 percent on financing $300,00 is $42. This .25 difference between the two rates of interest translates to $48 for each .125 percent of an interest rate for every $100,000 borrowed, so it stands to reason $8.25 per .125 will determine what a higher or even lower rate means to the mortgage payment.
Reducing effects of higher
rates on a home loan
Higher mortgage rates mean higher interest expense and subsequent higher payment on the same amount borrowed in an otherwise more favorable rate environment. This puts more of a strain on qualifying for the loan, let alone the adjusting of the budget to fit the new mortgage payment.
Some easy ways to budget the mortgage payment include:
• Paying off other monthly obligations, avoiding cash flow disturbances.
• Consider paying upfront overhead (percentage of the loan amount often termed discount points).
• Borrow less money by reducing the loan amount.
• Reduce the purchase price only if necessary.
• Increase the down payment.
• Use preferred debt in conjunction with the mortgage, such as loan against an asset rather than a credit card debt (in some cases a loan against a 401(k) isn’t even considered an obligation for qualifying).
Because mortgage rates are in a state of flux with consistent movement that began Jan. 2, 2013, it would be a wise decision to stay in close communication with your loan officer and take his or her advice on when to lock or when to float your interest rate. The advice will change daily based upon what’s transpiring in the financial markets.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.