How Will Rising Rates Affect Your Mortgage Decision?

Long-term interest rates on U.S. mortgages jumped the most this week in 26 years, according to data from Freddie Mac, with the average rate on a 30-year conventional, fixed-rate loan skyrocketing to 4.46 percent, up from 3.93 percent the week before. Rates have not been that high in roughly two years and have not made such a steep weekly jump since 1987.

“Following Fed chief [Ben] Bernanke’s remarks on June 19th about the possible timing of reduced bond purchases, Treasury bond yields jumped over the week and mortgage rates followed,” said Freddie Mac vice president and chief economist Frank Nothaft in a statement. “He indicated that the Fed may moderate the pace of its buying later this year and end the purchases around the middle of 2014. Higher mortgage rates may dampen some housing market activity but the effect will be muted by the high level of buyer affordability, and home sales should remain strong.”

Yet as interest rates and prices rise, how will buyer affordability remain at a high level? Usually when rates rise, affordability falls. How will these inclining rates affect your mortgage options? The biggest issue will be how much mortgage you can qualify for. Let’s say that with rates at 4.0 percent you could have qualified for a maximum loan amount of $280,000. When rates rise to 5.0 percent in the next year perhaps, you might only be able to qualify for a loan of $250,000. That $30,000 difference may not seem like such a big deal, but with prices rising as well, it could knock you out of the running for a whole segment of homes.

Of course, to combat increasing rates you could always provide a larger down payment. If you have to save up for it though, rates might rise again in the mean time. It’s important to remember that interest rates are still incredibly low and affordable by historical standards, but the bottom line is that there has never been a more affordable time for securing a mortgage loan.

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