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This Is the No. 1 Thing to Remember About Higher Mortgage Rates

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Mortgage rates are pretty high right now compared with recent years. While rates dipped below 3% for a 30-year fixed-rate mortgage during the pandemic, the weekly average rate for a 30-year mortgage was 6.79% as of June 1, 2023, according to Freddie Mac.

This can be a huge discouragement if you are hoping to buy a property without putting too much pressure on your bank account. But, if you find yourself upset by the fact that rates are higher, there’s one key thing to remember.

Your mortgage rate today doesn’t have to be your rate forever

While it may seem frustrating to see that rates are so much higher now than they were a short time ago, you need to remember that the rate you get on your home loan now does not necessarily need to be the rate you are stuck with for the life of the loan.

See, when you take out a mortgage loan, you typically have the option to refinance it whenever you want to (as long as you don’t owe more on your home than it is worth, maintain good credit, and have enough income to qualify for a refinance loan). If your finances are in reasonable shape, you should be able to refinance the loan with either your current lender or with a new lender of your choosing including a bank, credit union, or online lender.

Refinancing means you get a new loan and use it to pay your current mortgage. When you do this, you change the terms of your home loan to whatever the new loan’s interest rate and payment are. So if rates drop and you refinance to a new loan with a lower rate, you will now be able to pay interest at a reduced rate once you’ve completed the refinance process. You’ll trade your old high-interest loan for a new low-interest one instead.

Since you can refinance, you don’t have to worry about being stuck with your costly loan forever if rates happen to drop again.

There’s a one-way risk when you borrow to buy a home

The fact that you can refinance your loan if rates drop is extremely important because it makes taking out a mortgage a one-way risk.

When you borrow with a fixed-rate loan, the mortgage lender you have your loan from can’t just change your rate or payment if rates keep going up. It is stuck loaning you the money at the agreed-upon rate. But you do have the chance to change your loan if rates go down and you choose to refinance. So the lender takes on all the risk of rising rates.

Say you’re concerned about borrowing at today’s average rate of 6.79% and are thinking about waiting until rates fall. If you instead opted to go forward with borrowing and rates did decline, you could refinance. But if rates instead went up even higher, to 8% or 9% or more, you would benefit from the fact you’ve locked in at today’s rates.

Because there’s no way to tell if rates will rise or fall, you may want to move forward with a home purchase now as long as you can easily pay the monthly bills — even if the rate is higher than you prefer. That way, you lock in what you have access to now to protect yourself from rising rates while keeping the door open to reducing borrowing costs by refinancing in the future.

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