Mortgage Rates Are Rising: What Homeowners Should Do Now

Mortgage rates are an important factor when it comes to affordability in the housing market. And unfortunately, rates just went up again, potentially complicating plans for homeowners who want to refinance, relocate or downsize.

According to Freddie Mac, the average 30-year fixed mortgage rate recently reached 7.28%, while the 15-year rate increased to 6.60%. Meanwhile, the Mortgage Bankers Association reported that mortgage applications fell 6% overall and purchase applications dropped 4% as rates moved higher.

For homeowners who have a decent amount of equity, higher rates don't necessarily mean you need to put your plans to refinance or buy on hold. There are several factors to consider, such as your mortgage interest rate, equity, cash flow and how long you expect to own your home. Here's what you need to consider now that mortgage rates have increased again.

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Is refinancing off the table?

Generally, refinancing can be a good option when you can lock in a lower interest rate and reduce the overall cost of your mortgage. The Mortgage Bankers Association's latest Weekly Applications Survey found that refinance applications fell 9% from the previous week, but that doesn't necessarily mean refinancing is off the table for everyone.

Seeing rates go up can be discouraging, but it's important to factor in your current interest rate, remaining balance, closing costs and how long you expect to stay in your home.

For example, someone who took out a 30-year mortgage at 7.5% a few years ago may still benefit from refinancing, particularly if they can qualify for a lower rate or want to shorten the loan term. But the potential savings depend on the new rate, remaining loan balance, closing costs and how long they plan to keep the loan.

If refinancing costs $6,000, for example, and lowers your payment by $250 per month, it would take around 24 months to recoup those costs. This is your refinance "break-even point." You can calculate it by dividing your total refinancing costs by your expected monthly savings. That's an important number to consider, especially if you aren't sure how long you plan to stay in your home.

Lowering your interest rate isn't the only reason to consider refinancing. Someone approaching retirement might refinance from a 30-year loan into a 15-year mortgage with the goal of eliminating mortgage debt sooner. But that strategy could significantly increase the monthly payment, so consider how it fits into your retirement cash flow before committing.

Should you choose a 15-year or 30-year mortgage?

Fifteen-year and 30-year fixed-rate mortgages are two common options when buying a home or refinancing, and each comes with different trade-offs.

A 15-year mortgage typically has a lower interest rate and can significantly reduce the amount of interest you pay over the life of the loan. The trade-off is a higher required monthly payment.

A 30-year mortgage spreads payments over twice as long, resulting in a lower required monthly payment but substantially more interest if you keep the loan for the full term.

Here's how the principal and interest payments on a $400,000 mortgage compare using recent average rates from Freddie Mac:

Figures are approximate and assume the loan is held for the full term. Payments include principal and interest only and exclude taxes, homeowners insurance, HOA fees, closing costs and other housing expenses.

In this example, choosing the 15-year mortgage increases the monthly principal-and-interest payment by about $769 but saves more than $354,000 in interest if the loan is held for its full term.

That doesn't necessarily make the shorter loan term the better choice. A 30-year mortgage offers a lower required monthly payment, which can provide more flexibility, particularly if you're approaching retirement and want to keep fixed expenses manageable.

You may also be able to make additional principal payments when your budget allows, reducing your balance and interest costs without committing to the higher required payment of a 15-year mortgage.

How downsizing can change the calculation

Downsizing may seem like an obvious way to lower your expenses in retirement, but moving to a smaller home doesn't necessarily mean you'll spend less. If you currently have a mortgage rate around 3%, for example, taking out a new mortgage at 7% could offset some of the savings from buying a less expensive home.

Consider a homeowner who bought a home with a $320,000, 30-year mortgage at 3% and has lived there for 10 years. Their home is now worth $400,000 and they still owe about $243,000, giving them roughly $157,000 in equity before selling costs.

If they sell and use that equity to buy a $320,000 home, they would need a new mortgage of about $163,000. Here's how staying put compares with downsizing at today's higher mortgage rate.

In this example, the homeowner moves to a house that costs $80,000 less and reduces the amount owed by about $80,000. Yet the required principal-and-interest payment falls by only about $232 per month because the new mortgage carries a much higher interest rate.

There's another trade-off. Staying put means the existing mortgage will be paid off in about 20 years, while taking out a new 30-year mortgage resets the clock. A shorter loan term or additional principal payments could reduce interest costs, but would also reduce the monthly cash-flow benefit of downsizing.

The mortgage payment isn't the only number to consider. Compare property taxes, homeowners insurance, HOA fees, utilities and expected maintenance costs for both homes. If you're moving to another area, particularly another state, research local property taxes and insurance costs rather than relying on what the current homeowner pays.

Your existing home equity also gives you options. You could make a larger down payment or potentially buy a smaller home outright. But putting a large portion of your wealth into a home could leave you with less liquidity for emergencies, investments, travel and other retirement expenses.

Ultimately, downsizing is about more than buying a less expensive home. Consider how the move would affect your monthly cash flow, available savings and overall retirement plan after accounting for selling and moving costs.

Deciding how much of your savings to put toward a home can have implications for the rest of your retirement plan. A financial adviser can help you weigh your housing costs, cash flow and other financial priorities before you make a move.

Use the tool below to connect with a vetted financial professional today:

Higher rates could give buyers some negotiating power

There's at least one potential upside to today's higher mortgage rates: Fewer buyers may be competing for homes. The Mortgage Bankers Association's seasonally adjusted Purchase Index recently fell 4% in a single week, while unadjusted purchase applications were 14% lower than the same week a year earlier.

Less competition could give some buyers more negotiating power, particularly in markets where homes are taking longer to sell. That may create opportunities to negotiate on price, closing costs, repairs or other seller concessions.

Meanwhile, buyers in many markets have gained more negotiating leverage. Homes spent a median of 61 days on the market nationally in September, according to Realtor.com.

Redfin also found that sellers gave concessions in 44.7% of U.S. home sales in the three months ending August, up from 42.6% a year earlier. Concessions can include money toward closing costs, repairs or mortgage-rate buydowns.

Of course, housing markets vary significantly by location. If you're considering a move, look at the number of homes for sale in your target area, how long properties have been on the market and whether sellers are cutting prices or offering concessions.

Those factors can give you a better sense of how much negotiating power you may have. A seller who's had a home on the market for an extended period, for example, may be more willing to negotiate on price, closing costs or repairs. That could provide another way to reduce the cost of buying a home without focusing solely on mortgage rates.

What to watch next

Mortgage rates are always changing, and Federal Reserve decisions aren't the only factor that determines where they go. Rates are also influenced by Treasury yields, inflation expectations and broader conditions in the bond market.

Rather than trying to predict exactly when mortgage rates will peak or waiting for a specific average rate, determine what numbers would make a move work for you based on your unique situation.

If you're thinking about downsizing, calculate the purchase price, down payment and monthly housing cost you can comfortably afford. If you're hoping to refinance, determine the interest rate that would provide enough monthly savings to justify the closing costs.

Mortgage rates may eventually move lower, but homeowners with significant equity don't necessarily need to put their plans on hold until they do. The more useful question is whether the numbers work for your finances, your retirement income and the amount of flexibility you want to preserve.

Use the tool below to compare some of today's top mortgage offers:

Related Content:

• How Much Does It Costs to Refinance a Mortgage and Other Questions to Consider
• 5 Things You Can Negotiate When Buying a Home
• Think You Can Afford That House? Run These Numbers First