Home Career Mortgage rates are rising. Here’s how to adjust your housing budget

Mortgage rates are rising. Here’s how to adjust your housing budget

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Home buyers are feeling the pressure of rising mortgage rates. In addition, housing prices remain high. This may cause many to reconsider their budget.

“As mortgage rates rise, it increases the cost of buying a home with a mortgage,” explained Danielle Hale, chief economist for Realtor.com.

“For many homebuyers, higher mortgage rates equal higher monthly costs, especially for those taking out larger mortgages.”

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The rate for a 30-year fixed mortgage is now 5.65%, according to Mortgage news daily, up from 3.29% earlier in the year. The median listing price hit a record $450,000 in June, according to data Realtor.com.

At the current rate, a 30-year fixed mortgage on a $450,000 home means $2,078 in monthly payments if you put 20% down, according to Realtor.com Calculator. This does not include property tax, home insurance, home owner association fees or mortgage insurance as the down payment was 20%. If you put less, you are usually exposed private mortgage insuranceor PMI.

At a rate of 3.29%, the cost of such an arrangement is $1,575 per month.

The good news is that supply restrictions are easing more houses enter the market.

“We’re seeing a shift from what it was six months ago,” said Glenn Brunker, president of Ally Home.

“I wouldn’t say we’re in a buyer’s market, but definitely a market where the seller controls the experience, the transaction [and] price, we see some softening in that.”

Here’s what you should pay attention to when adjusting your housing budget.

Consider your overall budget

Consider all of your monthly expenses when considering your housing budget.

A general rule of thumb for how much you should spend on housing is this 30% of your income. These costs include not only the mortgage payment, but also any property taxes, homeowner’s insurance and maintenance.

However, how much you will actually spend on housing depends on your situation. If you don’t have kids, you might be able to spend more than 30% of your income — or if you have kids or student debt, it might mean less than that percentage, Hale said.

“The No. 1 thing for buyers to make sure [of] is that the monthly payment is convenient and fits their budget,” she said.

Look at the available interest rates

In addition to having a trusted real estate agent, research mortgage lenders and find one you can trust. Compare the interest rates available and find out about any fees that lenders charge.

The interest rate you get is partly up to you credit score. Generally, to get better advertised rates, your credit score must be above 740, Brunker said.

Work through different scenarios with your lender so you can understand how your monthly payment will change with future rate increases. You can also check different payments on different mortgage calculators from lenders or sites like Bankrate or NerdWallet.

Consider the terms of the mortgage

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There are different mortgage products on the market and different ways to calculate the monthly bill.

One way to lower your monthly payments is to make a larger down payment so you’re not borrowing as much of the property’s value. That might work for someone selling a home with a lot of equity, but the choice is likely to be difficult for first-time buyers, Hale said.

Likewise, putting money down early by buying so-called “mortgage points” can lower your interest rate. Each point costs 1% of the mortgage amount and typically lowers the rate by 0.25%, according to Bankrate. This approach may or may not work for your financial situation.

“Mortgage rate reductions can be very expensive, or sometimes you get a big reduction without paying a lot of points,” Hale said. “Most lenders will give you the best possible performance.”

On the other hand, you can lower your final home value if you get a 15-year fixed mortgage instead of a 30-year fixed loan, Brunker said. According to Mortgage Daily News, the current interest rate on a 15-year fixed loan is 4.95%.

“You’ll pay off the loan faster, saving interest over 15 years,” Brunker noted.

However, the monthly payments will be higher.

A riskier way to lower your payments by taking an adjustable rate mortgage. Loans offer lower starting rates than fixed rate loans. After a certain period – which is usually three, five, seven or 10 years – the ARM rate is adjusted according to current market conditions.

The risk is that once your fixed rate ends, you may end up with a higher interest rate and therefore higher monthly payments. Make sure you’ll be able to afford those payments when the time comes, even if you think mortgage rates will eventually go down and give you a chance to refinance.

“I wouldn’t bet on that happening and risk long-term home ownership,” Brunker said.

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