Financial Planning

What Should You Do With Mortgage Rates Going Up?

If you have been paying attention to interest rates, then you know they have shot up as of late. In January 2021, a 30 year mortgage was around 2.65% and now today they are above 5.3%. It has nearly doubled in a 4 month period of time. 😳 Pretty crazy, I know.

The real question is, what does this mean for you? In order to answer this, we have to split you up into a few groups since how you handle this will be different based on what life stage you are in.

People Who Are Thinking Of Moving To A New House

If you were thinking about selling your house and moving to another one in the same area, this may not be the best time to do so and here’s why. If you have a $500,000 mortgage at a 2.65% rate, your monthly payment would be around $2,020 a month and that does not include insurance and taxes. Now, if you went and got that same size mortgage with an interest rate of 5.3%, it would cost you $2,776 a month. Almost a $750 difference for the same size mortgage. However, most of the time when people move in the same area it is to upgrade houses, so let’s say you are upsizing to a $650,000 mortgage. This house at a 5.3% interest rate, would result in a $3,609 a month payment. That is $1,600 a month more! It might no longer be affordable to upgrade houses and move up interest rates at the same time.

I am not saying you shouldn’t sell your house and move somewhere else. I simply want to make you aware of how much of a difference a change in interest rates can be. You should never make decisions solely based on the numbers, but you do need to be aware of those numbers so you aren’t stuck with a mortgage you can’t afford. 

First Time Home Buyers

Now, if you are a first time home buyer, what should you do? You should first make sure you are getting a house that fits your budget. What you were targeting 6-12 months ago may no longer be affordable today with the rise of interest rates. This may require you to delay your home purchase a little bit so you can save more and increase your income. Your other option is to decrease the purchase price you were targeting or just know that things may be tight for a couple of years when you first get the house. It just depends on much of a priority this is for you.

Many financial advisors tell people to not spend over a certain percentage of their income, which I agree can be smart. But if you are in your 20’s or 30’s and your income is steadily growing every year, it could be okay to use a higher percentage of your income on a house for a few years. Just realize that this may stop you from being able to spend on other things when a large percentage of your income goes to fixed costs.

Current Home Owners Trying To Decide To Payoff Your Mortgage Quicker Or Not

If you currently are living at home and trying to debate whether you should pay off your mortgage quicker or not, here are a few things to think about. Paying off your mortgage quickly is a personal decision that comes down to how you feel about debt. It can be freeing to have no debt and no monthly payment. However, if you have a 2.5%-3.5% mortgage, you may have gotten one of the best deals possible. Mortgage rates are never this low, and choosing to pay it off over 30 years and keep that low rate could be advantageous. But again, the important thing is to actually invest those dollars you would be putting towards the mortgage to pay it off quicker. If you aren’t going to do that, then paying more could make sense.

At the end of the day, there is nothing you can control about interest rates. We have no idea when or how much they will go up, you just have to be aware of them and see how they impact your options. Ultimately, you need to make the best choice for you and your family.

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Disclaimer: none of this is advice, it is just for informational purposes. Talk with your financial planner before implementing any of these strategies.