Current mortgage rates continue to hover at or near historic lows. That’s good news for current homebuyers, but what if you feel you need to wait to buy a home? The Federal Reserve has hinted they may raise interest rates later in the year. Are you missing out on an opportunity?
What to Know About Mortgage Rates
You’ve probably heard some of the chatter about the Federal Reserve and its interest rates. What you may not know is that mortgage rates aren’t dependent on the rate published by the Federal Reserve. They’re based on the mortgage bond market or mortgage-backed securities. Still, understanding the Federal Reserve’s position indicates where things may trend with mortgage rates.
Buy now or later?
This is a tough question to answer, as the right response varies between individuals. Figuring out the right answer depends on your personal circumstances, financial situation, and future goals.
For example, if you’re planning to move out of state in the next one to three years, it’s probably not a good idea to buy a home. Or, if your credit score is low, it may be best to wait and work on improving that to get a better overall rate than you would by trying to buy now.
While we can’t give you a definitive “buy now” or “buy later” answer, we can look at a few scenarios to help inform your decision-making.
For these scenarios, we’ll use Bankrate’s survey of the nation’s largest mortgage lenders. It uses its survey results to create averages based on a 740 FICO score for a single-family primary residence purchase.
To keep things simple and allow us to compare apples to apples, we’ll also look just at 30-year fixed mortgages on a $250,000 single-family primary residence home. The terms will include a 20% down payment, which is $50k, so the owner is financing $200k.
On March 1, 2021, the benchmark 30-year fixed mortgage rate was 3.250%, with an APR of 3.450%. Keep in mind this was an average figure, as some lenders posted rates as low as 2.75% with a 2.9% APR. (Hint: that’s why it pays to talk to many lenders, including Luminate!)
For $200,000 in financing, the owner is estimated to end up with a monthly payment of $1,267. Of that, $870 will be in principal and interest. The total amount paid over the loan’s life–not including property taxes, homeowner’s insurance, or HOA fees–is $313,451.
Let’s say by July 2021, the rate on the 30-year mortgage increased slightly to 3.350% with an APR of 3.550%. How will this small increase of 0.1% impact the same loan?
Now the homeowner will have a monthly payment of $1,278. The principal and interest are $881 of that payment. Over the life of the loan, the owner will pay $317,424, or $3,973 more.
What if the mortgage rate increased to 3.5% with a 3.75% APR? On the same terms, the homeowner is projected to have a monthly payment of $1,300. Their principal and interest represent $903 of that payment. Over the life of the loan, they’ll owe $325,516, or $12,065 more than if they locked in the loan on March 1, 2021.
As you see, as we play around with mortgage rates, it starts to add up over time. Keep in mind that different things will impact your exact monthly payments and lifetime payment. These include:
- Property taxes, which regularly increase
- Home insurance, which also increases over time
- Private mortgage insurance, if you put less than 20% as a down payment
- Your credit score
- Paying extra on the principal
- Paying points
- Initial fees on the loan, such as mortgage origination fee
Let the experts at Luminate shine light on your personal financing scenario. See what kind of rates you might qualify for today to help you decide if it’s better to buy a home today or to wait for the future.
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