Will rising rates impact my mortgage payments?

With inflation on the rise, many people feel the pinch of higher costs in areas ranging from gas to groceries. Meanwhile, housing prices continue to climb, even as sales volume stumbles. To counter this inflation, the Federal Reserve began to raise interest rates in March 2022 and has been signaling even more rate increases in the future. 

Amidst these changes, mortgage rates have also shot up. But does that mean that homeowners will have to start paying more every month? If so, is there anything that can be done to counter rising costs? The answers can be a bit complex, as not every homeowner has the same type of mortgage or personal finance situation. 

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Will my mortgage payments go up?  

For current homeowners with fixed-rate mortgages, nothing has to change. Whatever rate you locked in when you took out your mortgage will continue for the life of the loan, so your monthly payments won’t change.

If you have a variable-rate or adjustable-rate mortgage, however, then your lender could start to increase your interest rate, leading to a change in your mortgage payments. The specifics depend on the terms, though. Some adjustable-rate mortgages can have rate changes every six months, whereas others can only change once per year. In some cases, locking in a good variable rate now is your best bet.

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What’s happening with interest rates in the US?

In response to the Covid-19 pandemic, the Federal Reserve quickly dropped the federal funds rate target — the rate at which banks lend money to one another overnight — to essentially zero. Doing so was meant to spur economic activity, such as by incentivizing lending, rather than keeping money stocked away to accrue lots of interest. 

The Fed funds rate, along with some other levers the Fed can pull, also influence other types of interest rates, like mortgage rates, even if there’s not a direct tie. That’s not to say that mortgage rates always move in line with what the Fed does, but mortgage rates were historically low in 2020 and 2021.

Since then, as the economy has recovered, inflation has also grown. So, to counter rising costs and try to prevent the economy from overheating, the Fed raised the fed funds rate target range to 0.25-0.5% in March 2022, and it has suggested that more rate increases will occur. Plus, the Fed is planning to sell some of the debt assets on its balance sheet, which can further contribute to rising interest rates on a broader scale.

Meanwhile, mortgage rates have also been climbing. In April 2022, the 30-year fixed-rate mortgage average crossed 5%, according to Freddie Mac. That’s still relatively low on a historical scale, but typically much higher than what homebuyers have faced for most of the past decade-plus.

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What do rising interest rates mean for mortgages?

Higher interest rates affect multiple areas of the economy, including real estate. What can be confusing, though, is not everyone faces the same effects.

For real estate as a whole, higher mortgage rates can reduce demand as they generally make buying a home more expensive. In March 2022, year-over-year existing home sales in the US  dropped by 4.5%, according to the National Association of Realtors (NAR). Still, the housing market remains strong in several areas.

Lawrence Yun, NAR's chief economist, explains in an NAR article: "The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power. Still, homes are selling rapidly, and home price gains remain in the double-digits.”

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How will this affect the housing market?

‍Regardless of which type of mortgage you have, higher interest rates can affect your own home buying and selling activity. If demand is lower due to higher mortgage costs, that can make selling your home more difficult. And if you wanted to buy a new home, your new mortgage may come with higher interest rates.

Likewise, higher interest rates could affect the value of your home. So, if you’re looking to tap into your home equity, such as with a home equity loan or HELOC, then the amount you can access might change as a result of higher interest rates. Plus, the interest rates you pay for accessing your home equity will likely increase as broader interest rates rise.

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Should I refinance with rates going up?

‍Refinancing during a period of rising rates depends on your current mortgage terms and personal finance situation. If you have a fixed-rate mortgage and are happy with your monthly payments, you might not have a reason to change anything. 

However, if you took out a mortgage at a relatively high interest rate, you might decide to refinance now if you can lock in a lower rate, before mortgage rates go up further. Adjustable-rate mortgages tend to start much lower than fixed-rate mortgages, so if you’re comfortable with the risk of rates rising more later on, you might decide to refinance soon, before rates go up more.

At the very least, though, you could use this time to review your current mortgage terms. Twenty-seven percent of mortgage holders don’t know their current mortgage interest rates, according to a 2020 Bankrate/YouGov survey. So if you want to make an informed decision, make sure you know what you’re paying.

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How else can I adjust to rising interest rates?‍‍

Aside from refinancing, homeowners might adjust to rising interest rates through other types of real estate activity, like tapping into their home equity. Granted, rising interest rates generally means paying more to access this equity. But as other types of debt, like for credit cards, go up due to higher interest rates, accessing your home equity might help you consolidate your debt into a lower rate than if you paid off loans separately. 

Accessing your home equity might also be useful for those who want to buy a second home or an investment property. If homebuying demand tempers due to rising interest rates, yet you can afford another home, then you might have more opportunities in a less competitive market. Still, keep in mind the risks that come with tapping into your home equity. If you can't pay back the debt, you may have to eventually sell your home.

One option for homeowners who want to access their home equity is the Fraction Mortgage. Traditional HELOCs force you to make monthly payments on your balance , but the Fraction Mortgage  provides the loan as a lump sum, with the option to forgo monthly payments. So, as other costs rise, homeowners might want to leverage that flexibility and wait to pay off the HELOC until other factors like interest rates and inflation settle down.

With Fraction, you can unlock up to $1.5M of your home’s equity to use how you see fit.

Get your free estimate today. 

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Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.