Should Higher Interest Rates Scare Off NWI First Time Home Buyers?

by Denise Mathews | May 7, 2022

Denise MathewsDenise Mathews, Realtor© is a Northwest Indiana born, raised, and lifelong resident. Join her in exploring The Region thru the Northwest Indiana Living website & social media sites.

If your goal is to jump into the NWI first time home buyers pool and get into the home-buying market, you’ve probably heard plenty about the higher interest rates affecting mortgages in 2022. Maybe you are even on the verge of being priced out of the buying market by increasing mortgage rates.

Higher rates make it more expensive for home buyers to borrow money, and the higher the cost, the higher your house payment. When the Feds announced that it would raise the federal funds rate, the talking heads correctly predicted the rising mortgage interest rates we are seeing now. But don’t let the higher rates scare NWI first time home buyers away.

graph showing nwi first time home buyers the quickly rising mortgage interest rates

Both Graphs Courtesy Of Keeping Matters Current

It is true that interest rates have risen sharply in the last few months, as the graph above shows. What they don’t talk about though is, in reality, interest rates on mortgages are still fairly low compared to other times in history. Although we probably will never again see the once-in-a-lifetime low rates of last year, do not let the hype of today’s rising interest rates keep you a renter. First time home buyers can still get in on all the advantages of homeownership!

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What is an Interest Rate?

Interest is the amount paid as a charge on money borrowed. It is defined as a percentage, the rate. The amount of interest you’ll pay on a loan will depend on a number of factors, including the rate at which the bank borrows the money to loan out to their clients, your credit score, and how long you take to pay the loan off.

What NWI First Time Home Buyers Need To Understand About Today’s Higher Interest Rates

The higher mortgage rates right now are because the Federal Government raised the rate on the money they lend to the banks. They have done so twice this year so far. It’s a commonly-used technique to control quickly climbing inflation. The Feds already announced they plan to raise the rate six or seven more times by the end of the year. So even though it’s true that mortgage interest rates are double what they were six months ago, that is more indicative of how low they actually got than how high they are now.

Historic mortgage interest rate bar graph

The current average interest rate on a 30-year fixed mortgage is 5.11%. That’s still low compared to the 8.5% average interest rate since 1950. In the 80’s mortgage rates reached highs in the mid-teens! Today’s 5.11% doesn’t look so bad anymore, especially when we know it’s one of the lowest home buyers will be seeing for the foreseeable future.

How Higher Interest Rates Affect A Home Buyers Mortgage

A mortgage payment actually consists of four parts, called PITI. They are Principal, Interest, Taxes, and Insurance. Here is a nice video that explains how home mortgage payments work. As interest rates go up, that higher monthly interest payment is reflected in a higher mortgage payment. The good news is that once your loan is finalized, you are are locked in at that rate for the life of the loan, for most loan types. Even if rates eventually soar to double digits for new borrowers, you will still be paying your 5.28%. Since economists are predicting rates will go up, as already promised by The Fed, NWI first time home buyers should be scrambling to get in contract on a home now, before the next rate hikes.

MORTGAGE CALCULATOR

Determine what your mortgage payment would be with this mortgage calculator. Taxes and insurance portions are estimated per national average for those services.

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It’s OK to Shop Around for the Lowest Mortgage Rate Possible

All lending institutions are not created equal. If you don’t know which direction to turn for a loan, ask a local, trusted Realtor®. But before you apply for a home loan, compare the interest rates charged by as many lenders as possible. You can do this online or in person.

Don’t worry about your credit score taking a hit with each inquiry. Any loan inquiries made within a 14 day span will count as only one inquiry on your credit report. Consumer Protections want you to comparative shop without penalty. Tip: Buyers using good, local lenders often find themselves at an immediate advantage when making offers.

Tips for Managing Mortgage Payments When Interest Rates Are Rising

First time home buyers are frequently not aware that you have some avenues you can personally follow to help keep your house payment as low as possible.

Shop Around For Mortgage Rates

If your interest rate seems high, you might be able to find a better rate by shopping around for a different loan and/or lender. Your personal bank isn’t the only choice when securing a mortgage. There are also credit unions, mortgage lenders, and more.

Consider Unique Loan Products

For instance, adjustable-rate mortgages are a loan used in times of rising interest rates. As the name implies, the interest rate adjusts, starting very low at the beginning of the loan, and increasing 3, 5 or 7 years later. There are other mortgage loan types too, talk to your lender.

Keep Taxes and Insurance Low

We’ve discussed PITI and its effect on mortgage payments. Therefore, to lower your house payment, reduce your controllables…taxes and insurance. Shop for competitive rates on your homeowners insurance. Choose a home with lower property taxes. This is an easy way for buyers to cut their mortgage payments.

The Bottom Line: Should Rates Scare NWI First Time Home Buyers?

Higher interest rates may make your mortgage payments noticeably more expensive, but should the rates scare NWI first time home buyers? I believe the answer is NO. You may have to choose a home in a slightly lower price range to keep your mortgage payment in line, but it should be manageable. Your mortgage payment will still be cheaper than rent most likely. So don’t let rising interest rates make you afraid to buy a home. With the right planning and a knowledgable NW Indiana full time Realtor®, you can still get into homeownership without breaking the bank.

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