As of September 2022, the Federal Reserve has increased its benchmark rate four separate times, increasing the federal funds rate to a range of 2.25% to 2.50% from zero percent. The Fed’s actions are in response to severe inflation, with the central bank’s actions expected to cool the economy and reduce the inflation rate. But what about the question: is borrowing a good idea during rate hikes?
Is Borrowing a Good Idea During Rate Hikes?
If the Federal Reserve wants to cool the economy and reduce spending, does it make sense to borrow money when interest rates are rising? The answer isn’t an easy “yes” or “no.” Let’s learn how interest rates can impact borrowing and affordability.
Interest Rates and Fixed Rate Mortgages
Record-high home prices for buyers throughout the Southland remain despite interest rate hikes that make it much more expensive to borrow money. A borrower seeking a $400,000 mortgage would have paid about $1,700 monthly for the mortgage at the close of 2021. Now, with interest rates at a much higher place, those payments are up to $2,500.
Not all borrowers have the ability to deal with a monthly payment increase of $800. However, mortgage rates haven’t been on a steady upward climb despite the Fed’s battle with inflation and its interest rate hikes.
In fact, mortgage rates have wobbled up and down in response to the health of the economy. However, rates are certainly higher in the second half of 2022 than they were at the same time last year.
Borrowers able to contend with higher interest rates, at least for the short term until a lower rate refinance is available, may benefit from falling home prices. Record high home prices aren’t sustainable when interest rates are so high that the pool of buyers shrinks so much that bidding wars evaporate.
Borrowing isn’t necessarily a bad idea when interest rates are high. Buyers may score a great deal on the purchase of a home this year and pay less overall in interest and principal when they refinance when rates decrease.
Interest Rates, HELOCs, and ARMs
Unlike fixed-rate mortgages, borrowers should think very carefully before considering HELOCs and adjustable-rate mortgages (ARMs). Imagine getting an ARM with a 2 percent interest rate and then contending with an increase to 6 percent. For the average mortgage, that’s hundreds of dollars every month in higher payments.
Borrowers who are determined to get a HELOC or apply for an ARM should think carefully before finalizing their plans. Although interest rates currently seem high, time remains for the Fed to increase rates again before the close of 2022 or at the start of 2023.
Alternatively, home seekers looking at adjustable-rate mortgages may want to consider fixed-rate options. Similarly, homeowners thinking about a home equity line of credit (HELOC) may want to think about a home equity loan instead, which has a fixed rate.
Interest Rates aren’t the Only Consideration
The difference in the cost of a mortgage at 3 percent versus 5 percent is significant, but it’s not the only factor to consider when deciding whether to apply for a mortgage and buy a home. It’s easy to become too focused on interest rates and ignore the bigger questions: is now a good time to buy a home?
For applicants who have their down payment ready and a good credit score, increasing interest rates shouldn’t scare prospective homebuyers away from the home hunt. In fact, high interest rates may give buyers the upper hand as the real estate market cools off.
For Southland residents who want to buy a home, a cooling real estate market is certainly an event of which to take notice. When homes sit on the market longer because they don’t get enough offers, sellers often drop their prices. How does this impact buyers struggling with high interest rates?
A lower mortgage amount means a smaller payment, which helps home buyers that are on the edge of getting priced out of their preferred geographic area to qualify for a mortgage. The bottom line is that an increase in interest rates shouldn’t mean buying a home is completely off the table.
The interest rate is just one piece of the puzzle, and it’s important to consider other factors like home price when deciding whether to apply for a mortgage. Is now the time to buy a home? Look at the big picture to decide. Contact the top Los Angeles mortgage brokers today.