Preparing for the possibility of mortgage rate interest hikes

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.

Click here to read the article

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3 comments on “Preparing for the possibility of mortgage rate interest hikes
  1. Max Cafissi says:

    While I agree with most of your points, there are 2 glaring errors that I can see. Firstly, even though rates are at 2.99% or lower for a 5 Year Fixed rate Mortgage, all Lenders use a higher rate for qualification purposes. Most use a rate of 4.25% or, in the case of a Variable Rate Mortgage, they use the BofC prescribed rate of 5.24%.

    Secondly, if a Borrower starts off with a reduced amortization period ( ie 20 years instead of 25 ), most Lenders will not allow them to go back to a longer amortization as this would invalidate the Mortgage Document, I believe ( I’m not a Lawyer, but you are so you should know ). A better strategy is to take advantage of what most Lenders offer as a “double up” option, or increase the Mortgage payment by a specific percentage allowed by the Lender.

    those would be my recommendations.

    • Annalise says:

      Thanks for your comment. I’m glad to hear other people’s perspectives.

      However, I would like to comment on your incorrect assumption that there are two “glaring” errors in my blog post.

      First off, whether or not lenders approve borrowers at a higher interest rate, that is not the issue being dealt with here by myself or the article. Regardless of how borrowers are approved, there are always budget and cash flow issues unique to each borrower that lenders cannot always account for (ie: children’s programs and sports, pet costs, clothing, vacations, home repairs, emergencies etc.). The article, and myself are making the point that by reducing the amortization period, the borrower protects themselves from a potential cash flow problem. This is not an issue of loan approval.

      Second, yes, it may be considered a refinance by some institutions, but a lender will let you extend your amortization period for just the reason I am describing, cash flow.

      I hope that clarification helps.

  2. Dhru Enright says:

    Annalise,

    Great job summarizing the article. The table used in the accompanying article should be part of the basic litmus test used by banks when people are signing on for a mortgage! If this kind of common sense criteria was used beforehand, I’m sure that the trickle down effect (e.g. bankruptcies and foreclosures) would probably be a lot less.

    My five cents* for what they’re worth!

    * Inflation and the fact that there is no more penny has rounded the traditional ‘two cents’ to five.

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