When the economic downturn gripped the nation several years ago, high unemployment rates, layoffs and mortgage foreclosures were common topics featured in news stories. Despite these ominous economic clouds, there was one silver lining that consumers benefited from. The economic downturn resulted in mortgage rates being close to historic lows for a lengthy period of time. Now that the economy is recovering, unemployment rates are lower, stories about layoffs are minimal and mortgage foreclosures have slowed. In addition, interest rates are now rising. You may be wondering how rising mortgage interest may affect you.
When mortgage interest rates rise, the spread between deposit rates and mortgage rates increases. This means that the return on investments such as bonds and CDs may be lower in coming years. In fact, mortgage rates are expected to continue to rise throughout the coming year, and this means diminished returns for fixed rate investments. These fixed rate investments are generally used most commonly by retirees or those who are rapidly approaching retirement due to their relative security. Therefore, this particular group of individuals may feel a greater impact from rising rates.
Refinancing Your Mortgage
The lower interest rates in recent years triggered a considerable uptick in mortgage refinancing. Many homeowners took advantage of lower interest rates to lock in a lower mortgage payment or a shorter term. Many also took equity out of their home to pay off credit cards, make improvements to their home and more. With interest rates rising now, refinancing will become considerably less attractive for many home buyers. This means that funds that may be used to make home improvements, take large vacations and more may need to come from other sources for many individuals.
Your Home-Buying Power
Another important impact that will affect individuals relates to their home-buying power. Lower interest rates meant that home buyers could afford to purchase a larger or nicer home. In some markets, this resulted in stabilization in housing prices or even an increase in housing prices. Sellers had an incentive to sell their homes, and buyers enjoyed the ability to get more home for their dollar. However, as interest rates rise, home buyers will not be able to purchase as large or as nice of a home as they previously could. This may result in decreased interest in home purchases in some markets, and it may stabilize or decrease home values in some markets. It is important to note that mortgage interest rates are currently relatively low right now, and they are anticipated to continue to rise throughout the next year or two. Because of this, it may be more ideal for home buyers and sellers to take action sooner rather than later. Therefore, you may see a general decline in sales in some markets over the coming years as rates continue to rise.
As you can see, there are a number of ways that interest rates can affect you. Even if you do not plan to buy or sell a home in the coming years, the fact is that adjustments in housing prices, fixed rate investments and other factors can affect you. It is important to be aware of the changes that rising interest rates likely will trigger and to prepare yourself for the impact the rising rates may have on your life.
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Don Anfuso is a mortgage broker located in northern New Jersey. He enjoys blogging about mortage advice and news.