The steady decline of mortgage rates may in fact prove to be dangerous to current homeowners on a tight budget. I have heard from many of my peers working in the mortgage industry that an increasing amount of homebuyers are being approved for mortgages based on the monthly costs associated with a low interest rate. The concern from professionals is that once interest rates rise, and presumably they will as current rates are historically and uncommonly low, those same homebuyers will fail to be approved for refinancing on their current mortgages.
The cost of a $300,000.00 mortgage amortized over 25 years at 2.99% interest fixed over 5 years is $1,418.20 monthly. That number changes drastically when the interest rate is increased to 5%, with a $1,744.82 monthly payment.
As some of us know, a 5% interest rate is not uncommon, and was commonplace only a few years ago. This jump in interest, and subsequently a homeowner’s monthly mortgage costs, could cause people to be denied refinancing, resulting in the loss of family homes.
I thought the article below was very useful in terms of advising homeowners to prepare and protect themselves against possible interest hikes. To summarize, the article advises homeowners to select lower amortization periods so that their mortgage payments are slightly higher to begin with. The benefits are 1) the homeowner is working to pay off their mortgage faster and 2) if there was an interest rate jump, the homeowner could increase their amortization period, and be protected as they’ve already included a cushion in their current payments.