11 Dec Interest rates and your mortgage

Q. I know they’re talking about higher interest rates, and I’m buying a home. I was thinking about an adjustable but now I’m not sure. Can you guide me?
— Ready to own

A. Choosing the right mortgage for a home purchase takes some homework, so we’re glad you’re asking.

In today’s low interest rate climate — and you’re right, the talk is that rates will start to rise soon enough — locking in a low fixed rate is probably the way to go.

“Interest rates are at historical lows and the numbers can only go higher,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “Average mortgage rates have been at 8 percent and right now we are at 4 percent.”

Lynch took a look at the numbers for a $300,000 mortgage.

If you took a 30-year fixed-rate loan at 4 percent, your monthly payment would be $1,432.25, and it would stay that way for the life of the loan. If you instead tried an adjustable rate mortgage, and if rates went up to 8 percent, your monthly payment would be $2,201.29 — more than $9,000 more than the fixed rate.

That’s a budget breaker, for sure.

Sometimes homebuyers take an adjustable rate mortgage because they don’t think they’ll be in the home long enough for the rates to rise, but Lynch says that’s a mistake.

“If you are thinking that you only want to be in for a few years, then rent,” he said. “Real estate is a great long term investment. If you are only thinking short term, don’t do it.”

Plus, higher interest rates put downward pressure on home pricing, Lynch said. In that case, if interest rates do rise, people who can only afford, for example, $1,400 per month on their mortgage will now be priced out of your home when you try to sell. That may force you to sell the house for less than the price you paid for it.

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This story was first posted in December 2015.