Overall higher interest rates will not impact homeowners too much with just a .25% increase. This should comfort existing homeowners who monitor their equity along with prospective home buyers nervous about their new purchase.
The Federal Reserves’ short-term interest rates have been at zero going back to December 2008. The moment the Fed truly changes its stance on zero interest rate policy, seven years of extremely low mortgage rates and greater affordability will come to an end.
What many are unaware of is that housing demand is determined more by job creation and households than interest rates. When there is strong job growth around the country, people move into their own place to rent and buy for various reasons.
How to still qualify with higher interest rates?
A higher down payment if you have it, is a good move. Are you able to add another 5-10% down on the purchase? One of the advantages is you’ll have smaller mortgage debt.
Pay a discount point. It might be very financially wise if you have plans to live in the home for a long enough period to recoup the cost of that discount point.
Consider Fixed Rate ARMs. These may be a perfect option if you know you will stay in the home just 5, 7, or 10 years as they are generally lower than 30-year fixed rates. In an interest rate rising period, it is not uncommon for borrowers to choose Fixed ARM mortgages due to their lower rates and flexibility.
If your debt ratios become too high consider FHA loans and portfolio products for added buyer flexibility.
Last but not least, home buyers and homeowners might want to change their price points and loan amounts predicated on what they are able to qualify for with higher interest rates. This includes the size of the house, the neighborhood, or what the home comes with.
In a nutshell: This period of low interest rates was a extraordinary time of weak economic health and substandard housing principles. The time to buy a home is a lot better now as you can tell by the demand for housing in certain parts of the country. Housing affordability may be somewhat less, but today still looks very promising in contrast to the uncertainty of the future and where rates are headed.