What Changing Interest Rates Mean for Your Existing Mortgage Loan

10.17.2022 | Category: Homebuying

If you are one of the millions of Americans who have noticed interest rates changing over the last several months, you’re not alone. Interest rates have adjusted sharply in recent months due to inflation, which had immediate impacts on the homebuying market. 

According to NPR, that trend will probably continue as the Federal Reserve has signaled that additional rate hikes are likely in the coming months. But that doesn’t mean that a housing crash is coming. In fact, with inventory still not at the levels needed to meet demand, homebuyers might more realistically see a correction from the 2020-2021 home price surges. 

While there is a lot of discussion about how this impacts potential buyers, the trend can also affect current homeowners. If you’re looking to refinance, for example, these market trends can have homeowners wondering if they should hold off or make a move more immediately. If you’re looking to sell and buy a new home, it will also factor into your decision-making process. 

Whatever your scenario is, if you’re a homeowner, it’s important to keep a pulse on interest rates and how they might affect your current financial situation. 

If you have an adjustable-rate mortgage or are interested in one.  

With an adjustable-rate mortgage (ARM), your interest rate changes in alignment with national rates. If you currently have this kind of mortgage loan, now might be a great time to refinance to lock in a rate before the Federal Reserve decides to adjust rates again. 

Typically, however, ARM loans are offered at a rate slightly lower than fixed-rate mortgages. This could give you some initial savings if you just locked in your current rate compared to traditional fixed-rate mortgage loans. 

If you're considering an ARM, you're not alone. ARM applications are at 15-year high. If you're content with some of the risk or think you may refinance to a fixed-rate loan down the line, then an ARM might be right for you. Just be sure to carefully consider the pros and cons and discuss with a trusted loan specialist. 

If you can switch from a 30-year to a 20-year or 15-year term.

The most common mortgage for most homeowners is a 30-year fixed rate mortgage. These loans will continue to have the same interest rate regardless of changes in the housing market. 

However, if you have a rate higher than today’s average rates, you might be among the number of homeowners that could benefit from refinancing a home mortgage loan, either to a lower rate or shorter term. 

Another option, especially if your goal is to save money on interest over the life of the loan, is to refinance from a 30-year term to a shorter-term loan, such as a 20-year or 15-year loan. With this option, you are in a position to save a significant amount of cash in interest. You’ll also be closer to owning your home outright sooner, putting you in a better position to save or invest your money.

The major drawback is that you will likely have a higher monthly payment since your loan payments aren’t spread out over a longer period. 

If you're looking to tap equity.

In addition, if you have earned a substantial amount of equity over the years, rising home values might help you access your equity. A home equity loan allows you to borrow against the value of your house. This option is perfect if you’re looking to make major home improvements like kitchen renovations or bathroom upgrades. 

Homeowners can also use home-equity loans to repay school loans, medical bills, or other high-interest debt. Even as traditional home mortgage rates rise, they’re still typically lower than many school loans, medical bills, or credit card debt. Using a home equity loan is a great way to put your house to work for you and help you better manage your monthly payments. 

If you're looking to sell your home and purchase a new home.

With home prices still at record highs due to low inventory in most markets, if you’re looking to sell your home, you may still make a handsome profit that positions you well to buy. The great news - your contingencies won’t be the sticky issue they might have been a year ago when the seller’s market was at its peak. 

It’s important to set your expectations realistically. Not every market or neighborhood is experiencing the same fluctuating market conditions. Talk to a trusted real estate agent In the area you're looking to sell and buy, and align your budget with your goals, knowing that no matter what the market looks like, you will have the support you need to meet any surprises head-on. 

Changing rates doesn’t have to deter you from reaching your financial goals. If you’re ready to make a change, reach out to a Mutual of Omaha Mortgage specialist to learn more about our home loan solutions.