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What do higher mortgage rates mean for my home loan?

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Inflation and interest rates are becoming the topic of conversation around kitchen tables across the United States. The Federal Reserve has already raised interest rates by a total of 150 basis points since the start of the year. Borrowers are already seeing the impact on the interest rates they pay on unsecured debt. This is also evident in rising mortgage rates. From rates below 3% in 2021, the average rate for a 30-year fixed rate mortgage is now above 5%.

Many current and potential homeowners are wondering what impact these rising mortgage rates will have on their home loans. The simple fact is that the cost of financing a home is rising. But the type of mortgage you have will determine how much rising mortgage rates will affect your home loan.

Fixed rate mortgages provide cost certainty

If you already own a home with a fixed rate mortgage or signed a contract that fixes a fixed rate, you can breathe easy. Your rates will not change. This is the advantage of a fixed rate mortgage. In the face of inflationary pressures and rising interest rates, homeowners are confident that their mortgage will not increase.

The Perils of Adjustable Rate Mortgages

If you have an adjustable rate mortgage (ARM), you may not be so lucky. When interest rates rise, variable rate mortgages rise. This will increase the amount of money borrowers pay on their mortgage. In fact, it was this readjustment of interest rates during the financial crisis that forced many homes into foreclosure or short selling.

However, all hope is not lost. First, variable rate mortgages come with a cap. This means that there is a limit to how high the interest rates (and by extension the payments) will be during the life of the mortgage. Therefore, if borrowers have the financial means, they may choose to exit the current interest rate environment and hope that rates will stabilize or even reverse at some point.

Alternatively, unlike interest rates on credit cards, auto loans, and personal loans, resetting ARMs can take a bit of time. This is usually done annually or semi-annually. This means that, depending on their particular schedule, qualifying homeowners may have time to refinance their mortgage to a fixed rate mortgage to gain cost certainty.

It’s like the 1980s for mortgage rates

According to Nerd Wallet, as of June 2, 2022, the average mortgage rate on a 30-year fixed mortgage is 5.236%. For a 15-year fixed rate mortgage, the rate is 4.437%. and for a 5-year variable rate mortgage (ARM), the rate is 4.184%.

Millennials have yet to experience inflation at these levels. And for many millennials, mortgage rates above 5% are higher than they remembered when they were alive. But historically, mortgage rates are only now approaching the 50-year average (records weren’t kept by Freddie Mac until around 1971).

In fact, in 1981, the average rate for a 30-year fixed rate mortgage was over 16.6%. And keep in mind that this is a rate that was available to borrowers with impeccable credit and a large down payment.

However, such comparisons must be balanced with the fact that our society is very different from what it was in the early 1980s. It is much more credit-oriented and consumer-oriented. And student loans are part of millennial budgets in a way that older generations didn’t.

As of the date of publication, Chris Markoch had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

What do higher mortgage rates mean for my home loan? appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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