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Buying a Home? Rising Mortgage Rates Are One Consideration

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May 9, 2018
People examining their potential mortgage rates
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Buying a home is often the most expensive purchase you’re ever going to make. If you’ve been thinking about buying, or you’re already in the process, the recent climb in mortgage rates might have you feeling like you need to speed things up. 

Fast-selling homes and high prices across the U.S. housing market could also be adding to your sense of urgency.

The median-valued home sold in 2017 was on the market for just 81 days, nine days less than 2016, according to an April 2018 report from Zillow. Those figures include closing, which can take four to six weeks, bringing the time the typical home was on the market before going under contract to only around 30 days.

On top of that, home prices in many major markets have recovered well past their 2007 pre-recession peak. U.S. house prices were up 7.3% from January 2017 to January 2018 alone, according to the Federal Housing Finance Agency.

Regardless of the state of the U.S. housing market, you should take a calculated approach with important financial decisions like buying a home. Mortgage rates are a key consideration, but they’re just one part of the overall picture.                    

First, let’s take a look at current mortgage rates and how changes can impact mortgage payments. Then, we’ll look at other factors to keep in mind during your housing hunt.  

Mortgage Rates Today

It’s true that mortgage rates have been going up overall in recent years as the Fed hikes its benchmark Federal Funds Rate, which influences overall interest rates for everything from mortgages to credit cards. However, it’s never a straight path and mortgage rates are prone to fluctuation (see chart below.)

30-year fixed rate mortgage rate chart

30-YEAR FIXED RATE MORTGAGE AVERAGE.

This chart from the Economic Data tab on the  thinkorswim® platform by TD Ameritrade shows the average interest rate on a 30-year fixed rate mortgage in the U.S. since 2009. Data Source: Federal Reserve's FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only. 

As of May 3, these were the average interest rates for common mortgage loans in the U.S. according to Freddie Mac’s Primary Mortgage Market Survey:

  • 30-year fixed mortgage rates were 4.55%, up 0.53% over the past year
  • 15-year fixed mortgage rates were 4.03%, up 0.76% over the past year
  • 5/1-year ARM (adjustable rate mortgage) rates were 3.69%, up 0.56% over the past year

Keep in mind these are just averages and the rate you might get can vary depending on factors like your credit score, the size of your down payment, your debt-to-income ratio, whether or not you decide to buy points or accept lender credits, and other factors.

How Rising Interest Rates Can Impact Your Mortgage Loan

Below is a chart showing how different mortgage rates can impact your monthly payments and the total cost over the course of the loan. For the case of simplicity, we’ll focus on the most common type of mortgage, a 30-year fixed rate. 

Chart showing the cost of a 30-year fixed rate mortgage at different mortgage rates

HOW HIGHER INTEREST RATES IMPACT MORTGAGES.

The chart above shows the cost of a $200,000 30-year fixed rate mortgage at various interest rates. This example doesn’t include the cost of property taxes, property insurance and other costs/fees that should also be taken into account when considering a home purchase. For illustrative purposes only.  

Looking Beyond Mortgage Rates: Other Things to Consider When Buying a Home

While mortgage rates are one of the obvious things to consider when it comes to buying a home, there’s a lot more to the financial picture. Here are some other questions to think through:

  • How will your taxes be impacted? The amount you can deduct in state, local and property taxes in 2018 has been limited to $10,000 by the Tax Cuts and Job Act. At the same time, the standard deduction for individuals was increased to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers. The mortgage interest deduction has also been limited to the first $750,000 in principal value of your home. These changes could end up impacting the potential tax benefit you might be expecting from owning a home, so it might make sense to consult with a tax professional to understand the effects.  
  • How does buying a home fit in with your other financial goals? Stretching what you can afford or rushing to buy just because mortgage rates are lower might seem to make sense at first. Take time to think through how different home prices, mortgage rates and monthly payments might impact your other financial goals, whether it’s saving up for retirement, a new car, or sending kids to college. You don’t want to find out years down the road that you need to make sacrifices you weren’t planning for. And even though home prices have appreciated over time, your ability to achieve your financial goals shouldn’t depend on selling your house for a certain price in the future.
  • Are you prepared for unexpected circumstances? Thinking through negative scenarios isn’t fun, but it can be a wise approach when it comes to your finances. Buying a home can whittle down your cash savings—especially if you’ve stretched for the high end of what you can afford—leaving you less prepared if/when an emergency expense comes up. Look at how the price range of homes you’re considering and their accompanying monthly payment might impact your overall budget.
  • Buying a home can simultaneously be one of the most exciting and one of the most stressful times in your life. Like any major financial decision, think everything through before you get too far in the process.

Whether you’re saving up for buying a house or retirement, setting financial goals and building a plan to help you get there can seem like a daunting task. Learn more about setting financial goals and how TD Ameritrade can help. 

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