- As mortgage interest rates soar above 7%, many home buyers are wondering if they should buy or wait.
- Many would-be home buyers have to decide whether to take a 30-year or 15-year fixed-rate mortgage.
- How much of an option is an adjustable-rate mortgage of home buyers?
With mortgage interest rates hovering around 7%, more than double since the start of 2022, prospective homeowners are likely asking themselves how much home can they afford and what’s the best way to finance it.
“Housing markets continue to feel the direct impact of higher mortgage rates,” George Ratiu, manager of economic research for Realtor.com, recently wrote. “With incomes lagging behind inflation, homebuyers’ ability to finance a purchase has been slashed by mortgage rates which surged from 3.1% at the start of 2022 to almost 7%.”
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Along with the amount financed and the interest rate, the term of the mortgage directly affects the monthly mortgage payment.
The most common options and fixed-rate and adjustable rate mortgages. Here’s what buyers need to know about both. know.
What is a mortgage?
In short, a mortgage is a loan that allows a home buyer to cover the cost of a home they are purchasing.
Mortgages are usually repaid monthly over 15 or 30 years and include principal (the home’s price minus your down payment) plus interest, said Realtor.com.
A monthly mortgage payment may also include money for property taxes and home insurance premiums, Realtor.com said. O’Donnell said that these funds are put in an escrow account that your lender will use to pay these bills.
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What’s a fixed-rate mortgage?
A fixed-rate mortgage is a home loan option with a specific interest rate for the entire term of the loan, according to Rocket Mortgage.
The interest rate on the mortgage will not change and the borrower’s monthly payment remain the same.
“Usually, when interest rates are low, it makes sense to lock into a fixed rate mortgage,” said Anthony Graziano, CEO of Florida-based Integra Realty Resources.
A fixed-rate mortgage can have a term of 30 or 15 years or even a custom term. Rocket Mortgage said that a 30-year fixed-rate mortgage is America’s most popular mortgage option.
“Ninety-nine percent of my clientele use 30-year fixed-rate mortgages,” said Kristina O’Donnell, a longtime realtor in the Philadelphia area. “They know what they are going to pay and for how long. Many prefer to have their payments stretched out over a long period of time.”
A 15-year fixed-rate mortgage requires a higher monthly mortgage payment than than a 30-year term. A 15-year fixed-rate mortgage usually features a lower interest rate, allowing borrowers pay off their mortgage in half the time and save thousands of dollars over the life of the loan.
What is an adjustable-rate mortgage?
An adjustable-rate mortgage is a home loan with an interest rate that can fluctuate over time.
Adjustable-rate mortgages typically offer a lower introductory interest rate than fixed-rate mortgages, but your monthly payment can change after an initial period, usually between three, five, seven, or 10 years, experts say.
When that introductory period ends, lenders adjust the interest rate at predetermined periods by adding the index interest rate – which reflects general market conditions –and the margin, a number set by the lender, according to the Consumer Financial Protection Bureau.
The index changes typically once every six months.
Graziano said if the index is lower than when the borrower got the loan, their rate and mortgage payment will decrease. However, if the index is higher, the interest rate and mortgage payment will increase.
Maurer said those who opt for an adjustable-rate mortgage usually plan to stay in their home for a few years and want to pay the loan off before the low introductory rates expire.
“If interest rates go down, (adjustable-rate mortgages) can become less expensive,” Rocket Mortgage said. “However, (adjustable-rate mortgages) can also become more expensive if rates go up.”