Mortgage Rates Are Likely to Rise Again Soon. Here's What Home Buyers Need to Know

Don't buy a house until you understand the impact of rising rates.

Mortgage rates are now well above 5% on a 30-year fixed-rate mortgage. Rates have hit record highs over the past few months, coming up from the record lows they hit during the pandemic. Seeing rates above 5% may be shocking considering the average 30-year fixed-rate mortgage rate had fallen below 3% during 2021.

Unfortunately, it is likely that rates have not yet peaked. Inflation is still surging and the Federal Reserve is expected to raise interest rates several times during 2022. While mortgage rates are not directly tied to the Federal Reserve, they are impacted by the central bank's decision on the federal funds rate since that's the rate at which banks can lend money to each other overnight.

Mortgage rates are likely to go up again as the Federal Reserve takes action to deal with inflation. With that in mind, here's what home buyers need to know about what rising rates mean for them.

Higher rates mean your loan will be more expensive

The biggest impact of rising rates is that your loan will be more expensive. Each month's mortgage payment is based on principal and interest costs. If interest rates go up, payments go up -- and total financing charges do as well.

If you want to play around with the numbers to see what you might be able to afford -- and experiment with different interest rates -- check out our mortgage calculator for more information.

For example, when rates go up from 3% to 5%, borrowers will pay around $100 more each month per $100,000 in mortgage debt. This can make a huge difference in your budget and in the total cost of your loan over time.

It can be harder to qualify for a mortgage at a higher rate

Mortgage lenders consider your income relative to all of your debts, including your mortgage loan. If your debt-to-income ratio (DTI) is too high (above around 36%), it's harder to get approved for a loan.

When your mortgage payment rises due to higher interest rates, this adversely affects your DTI, and loan approval becomes more difficult.

Delaying until rates fall may not be the best choice

In light of the fact that mortgage rates are so much higher now than they were just a few months ago, you may be tempted to wait to buy a home until interest costs go back down. The problem is, there's no guarantee this will happen anytime soon and, as mentioned above, the opposite is likely to occur.

If you try to wait for rates to drop, you could find they go up instead so it becomes even more difficult and expensive to buy a home. And even if rates do decline eventually, you could have missed out of months and years of property appreciation and of building equity.

Plus, if rates go down after you've bought a home, you may be able to refinance to lower your future mortgage payments. But if rates go up, you can't go back in time and get a loan at today's rate.

ARMs may seem attractive right now but could backfire

Some home buyers may be tempted by an adjustable-rate mortgage (ARM) right now because the starting rate on an ARM is likely to be lower than what you'd be charged for a fixed-rate loan. But ARMs come with unneeded added risk. Since your rate is locked in just for the first few years, you could see your interest rate and total costs rise.

Rather than opting for a riskier loan, it's often a good idea to try to buy a house you can afford at today's rates and make sure you shop around among mortgage lenders to get the best deal possible on a fixed-rate loan. Hopefully, this will maximize the likelihood that the decision to buy is the right one in the long run since you can start building equity.

The key is to make sure your loan is affordable even at today's high rates -- and that you're financially ready to buy a home before moving forward.