The 30 year mortgage rate is hovering around 6%. Just in the beginning of 2022, it was around 3.5%.
After this very quick jump in rates. What should you do?
A lot of this answer boils down to personal factors that very much so differ person to person. But I will have some general takes with a broad range of what-if scenarios.
You’re a first time home buyer
If you are in this group, you are brand new to the housing market and the buying process. It is no secret, and I certainly don’t need to be the one to tell you that it is a stressful time of learning something completely new. It will most likely be one of the bigger purchases you ever make. BUT it is also an incredibly exciting time that you’ll remember forever.
But with a 30 year mortgage that is nearly double what it was just earlier this year what should you do.
This depends on who you are, what you do for a living, and what you’re looking for. So this breaks down into a couple categories. Timing and budget.
As a first time home buyer, it may not be a bad idea to delay buying your first home as mortgage rates have seen dramatic increases. While I know it is exciting and more often than not you just want the process to be over with and have the keys in your hand, it is important to remember that you’re making this decision today, but it is a decision that impacts you for the next 30 years. So in the grand scheme of things waiting an extra year may be annoying, it isn’t the worst thing.
Second is the budget. What your target price was for your home at 3% mortgage rates may not be what your target price range is at 6% mortgage rates. The cost to you monthly is significantly higher at the higher interest rate. So potentially lowering the price you’re willing to spend on a home is the first step there. Additionally, it is important to remember that the additional monthly cost will add up over time. For a $250,000 mortgage at 3% your payment is roughly $1,054 per month. At 6%, for the same $250,000, to $1,499 per month. This is $445 per month more for the same mortgage. If you take this out over longer periods it is $5,340 per year more and $160,200 more over the life of the 30 year loan.
Combining these two. It may be beneficial to delay your first home purchase as well as starting to lower your budget. In the meantime, you can still save extra money so when the time does come you have more of a down payment or to give yourself more of an emergency fund as you get used to being a new home owner.
Moving or upgrading your house
If you’re in this category the story is actually very similar as it is for first time home buyers. The difference is you’ve been here before and you know what to expect.
However, you still have to deal with the higher mortgage rates should you move and need to take out a new mortgage for the next home. You may run into a situation where the mortgage payment you have now may be much less than your next mortgage payment would be, especially if you’re spending more on the house.
If you have a $500,000 30 year mortgage at 3% your payment is roughly $2,108 per month. If you look to upgrade and the next home you buy is $650,000 at a 30 year mortgage rate loan of 6% your monthly payments turn into roughly $3,897 per month. That’s a difference of $1,789 per month, $21,468 per year, and $644,040 for the life of the 30 year loan.
However, the one advantage you’ll have is the ability to have a larger down payment given the money you’ll receive from selling your home. So depending on those numbers, it may look very different for you.
Paying off your mortgage early
Paying off your mortgage early is a huge accomplishment for many people. But is it always the right decision? Well, that depends.
It mainly depends on your relationship with debt. If you’re someone who hates having debt in any capacity and a major goal of yours is to pay off your mortgage so you can sleep better at night, then that might be the best path forward for you no matter what the numbers say. But, it is still important to know the numbers when making that decision.
If you have a mortgage rate at roughly 2.5-3% it is important to know you have a historically low mortgage rate. And with that comes a lot of potential. Your monthly payments are much lower than they would be if you had a 6% mortgage rate, like we’ve seen above. And having this additional cash per month gives you options. Choosing to pay your mortgage off over 30 years, while not paying extra, gives you the ability to invest the difference and potentially earn a much higher percentage return than 2.5-3%.
This all depends on how much you’re willing to invest per month over the 30 years. If you aren’t looking to invest the difference, then it may make more sense to pay off your mortgage early.
Thanks for reading!
If you enjoyed reading and are looking for an advisor feel free to reach out to me!