November 2022 began with an all-too-common theme, with the Fed, once again, hiking up the federal interest rate in an attempt to cool inflation. This latest increase brings interest rates to their highest points since 2008. It was the continuation of the most rapid tightening of monetary policy since the early 1980s, when inflation was last this high. People’s purchasing power is more directly impacted by inflation than by increases in interest rates. The markets had been expecting the rate hike and were also hoping to hear that this could be the final 0.75-point (or 75 basis point) change. Many economists predict that a recession will hit the economy in 2023 as a result of a series of rate hikes that have deterred borrowers.
When people say things like “the Fed is raising rates,” they’re referring to a change in the Federal Reserve’s target for the federal funds rate. That’s the rate the Federal Reserve Board’s Open Market Committee recommends commercial banks charge when they extend loans to other financial institutions.
Impact of Increased Interest Rates on Mortgages
Rising mortgage rates on 30-year, fixed-rate loans have made buying a home more expensive, potentially putting it out of reach for many people.
In 2022, the Federal Reserve raised interest rates multiple times, leaving homebuyers with a sobering reality: rising mortgage rates increase the cost of purchasing a home. With mortgage rates on the rise and the real estate market booming, new homebuyers can expect to see an increase in their monthly mortgage payment.
People may find it more difficult to qualify for home loans due to higher monthly payments, even if the home price remains the same, as a result of the recent rate hike. A higher home price can make it more difficult to get a mortgage because of the impact it has on your debt-to-income ratio (DTI). Lenders prefer that your monthly housing payment not exceed 30% of your gross monthly income, and that your total monthly debt payments not exceed 40% of your gross monthly income
With a fixed-rate mortgage, your interest rate and payment won’t change even if the market rate goes up. However, if you have an adjustable rate mortgage (ARM), your monthly payment could increase if interest rates rise, and new home loans with a fixed rate mortgage might cost more than you expect.
Tips to Combat Increased Interest Rates when Getting a Mortgage
Even though mortgage rates are on the rise, it is still possible to get a loan and purchase a home. To do so, however, you might need to make some strategic budgeting moves, like:
1.) Increased Down Payment
Put as much money as you can afford toward your down payment to reduce your loan-to-value (LTV) ratio. You may be able to negotiate a better interest rate with your lender if you borrow a smaller percentage of the home’s value.
2.) Improve your Credit Score
When determining the cost of your loan, your credit score is a major consideration for the lending institution. The likelihood of receiving a favorable interest rate increases as credit scores rise. Saving money on mortgage payments is one incentive to work on one’s credit history before making a home purchase.
3.) Avoid PMI on your Mortgage Loan
A 20% down payment is difficult to save for, but it can help you avoid paying private mortgage insurance (PMI) and reduce your monthly mortgage payment. PMI premiums can add up to 2% of your loan balance or more. You can save money each month by declining to purchase private mortgage insurance.
4.) Get a Shorter Term on your Mortgage Loan
Interest rates are typically lower for loans with shorter terms (such as 15 or 20 years) than for loans with longer terms. Though you may have higher monthly mortgage payments if you choose a shorter loan term, you may end up paying less interest overall.
Mortgage Lenders in Jacksonville, FL
If you or a loved one are in need of a mortgage loan in Duval County, don’t delay in calling one of our knowledgeable mortgage lenders in Jacksonville. For over a decade, Bayway Mortgage Group has been here to help consumers like you secure mortgages for your dream homes. The time to call Bayway Mortgage Group is now! Contact us today for your FREE mortgage consultation.