One of the big questions on the minds of consumers looking to purchase or refinance a home is what’s going to happen with interest rates in 2022. Interest rates, while they remain at historical lows, may experience some movement in 2022. Here’s what you should come to expect if you’re going to be buying a home this upcoming year and how changes in interest rate can affect your borrowing power.
Interest rates for the 30-year mortgage presently are in the high twos to threes. Inflation is presently starting to show its ugly head, and it’s beginning to become more of a threat to financial investments, including mortgage-backed securities, which directly influences the direction of mortgage interest rates. As a result, it’s possible that mortgage rates based on these economic factors are likely going to rise at least throughout the first half of 2022. When the Federal Reserve then starts to hike interest rates to offset inflation, which is poised to happen around the beginning of summer 2022, it’s probable that mortgage interest rates will probably slide back down to the levels they are presently at. Rising interest rates means the housing market will be a little bit softer. Will still be a tight supply but will otherwise still be soft. What that means is that as many people are going to be looking for houses out of 3.75 interest rate for example on a 30-year fixed as they are today for a 3 percent 30-year fixed. This is something that you should weigh into your scenario as it relates to buying a home.
If you are thinking about refinancing your home, whether it’s to pull money out for paying off debt, doing home improvement, or getting out of monthly PMI, the time to pull that trigger would be right now as interest rates have not started their estimated upward trend yet.
If you’re pre-approved for, say, a $600,000 home purchase and your target interest rate, let’s just say it’s 2.875 percent. An interest rate such as 3.5 percent if rates go to 3.5 percent represents a .625 percent change and interest rate to you based on what you might get in relationship to what you have presently. This change in interest rate will change your payment about $175 a month. $175 a month means that you’ll need an additional $350 a month in income to offset that debt. The other way to look at it is $175 a month more mortgage payment, also means in order to offset that obligation you could pay off a credit card, a car loan, or an installment loan to free up the $175 a month differential. $175 a month more in payment may influence whether you make an offer on that house or whether you don’t. Though whether you get pre-approved to purchase a house now, or in the later part of 2022, you should have at least a $200 month payment buffer anyway for a variety of reasons. The $200 month payment buffer specifically gives you more flexibility as it relates to your house payment, it also casts a wider net of opportunities. This means that if you can say “ok, I’m good with XYZ payment but I’m also OK if that payment is $175 a month more” that’s the right expectation, you should go in purchasing a house. $175 to $200 a month of payment can be upwards of $30,000-$40,000 of spending power on a house. That means the difference between a $600,000 house and a $635,000 house for example. This is something you should weigh into your financial mix as you decide whether you should take out financing or not.
So how do you know whether now is a good time to make an offer on a house and close on it or now is a good time to refinance your house? Quite honestly, only a local loan officer that understands the market, and that understands the dynamic of the trading of mortgage-backed securities. A loan officer that can best advise you about the optimal time to secure a payment, that’s woven into your budget, is probably the most pragmatic thing you can do to benefit your bottom line. At the end of the day, it is important to recognize that interest rates in 2022 more than likely are going to rise. Probably an 80 percent chance they’re going to rise and the fed’s actions to combat rising inflation almost certainly will result in lower rates again at the end of 2022.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.