How rising interest rates could impact homeowners

Discover how rising interest rates might impact your future homeownership.

Couple looking fondly at each other as they look over interest rates.

Over the past few years, the Federal Reserve (the Fed) has been gradually raising rates to fend off inflation and return to a more normal rate environment.

According to Freddie Mac, as we approach the end of 2018 the average rate for a 30-year fixed-rate mortgage is hovering around 4.75% — up from 3.95% at the beginning of the year. According to the Wells Fargo 2019 Outlook, as interest rates rise, real estate supply and demand conditions often deteriorate. This may negatively impact property values.

While there’s no guarantee of what the Fed will do, signs point to rising rates for 2019. So what does this mean for you, as a homeowner? Here’s what you need to know.

Your mortgage type might influence how rising interest rates hit your budget

Homeowners with fixed-rate mortgages who have no plans to sell, move, or buy another home in the near future likely won’t be very affected by rising interest rates.

Homeowners with adjustable-rate mortgages (ARMs) might want to keep an eye on rising interest rates if they are close to an adjustment period, because those increases may impact their monthly payments. As interest rates rise, payments on ARMs may also increase. However, refinancing your ARM to a fixed-rate mortgage can provide stability — and you gain protection from rising interest rates.

Homeowners with a Home Equity Line of Credit (HELOC) may also be interested in the rise and fall of rates. If you’re concerned about rising rates and have a HELOC with Wells Fargo, you may have the option to take a fixed-rate advance, which provides the ability to convert some or all of your HELOC’s balance to a fixed-rate repayment.

Infographic titled "Historical interest rated for 30-year fixed-rate mortgages". Wells Fargo Home Mortgage logo. Diagram showing lowest and highest rate points ranging from 0-20% on Y-axis over period of time from 1980 till 2018 on X-axis. Specific points singled out: 1981 Rates reach an all-time high of 18.63%; in 2008-2009 recession; in 2012 rates reach an all-time low of 3.31% Source: Fannie Mae PMMS data as of 6/20/2018

If you’re looking to buy a home, rising interest rates may make you rethink your plan

 If rates continue to rise, more homeowners and renters may opt to stay put. This is because if you have a low interest rate on your current mortgage, you may risk losing that by moving and taking out a new mortgage. Rising rates can be concerning if you have a lower credit score, since lenders will use that to determine your rate.

It might be harder to sell your house as well, since prospective buyers may wait for rates to drop. And for those who are renting, it may make more sense to continue renting instead of taking on mortgage debt with a high interest rate.

But even though rates have increased a little, remember that they’re still low compared to the past: the all-time high was 18.63% in 1981. If you’re considering buying a home, making your move earlier than you originally planned may make sense if you have the financial means, since you’ll be able to lock in a lower rate.

If you’re not ready to move, there’s a lot you can do now to ensure you get the lowest rate possible when it is time. This includes saving up more for a down payment, improving your credit, and talking to a home mortgage consultant to see how much you may be able to borrow. 

Written By: Kali Roberge