Many economists say mortgage rates will continue to trend upward for the remainder of 2018 and peak around 5.00% – 5.25% at most, which is still below average. Mortgage rates averaged consistently above 10% every year between 1979 and 1990 and then eased down to a range from 6% – 8% between 1992 and 1998, according to Freddie Mac’s records.
But when you’re the one buying a house, you’re probably more concerned about today’s interest rate environment and whether you can afford the house of your dreams. A higher interest rate does mean your monthly mortgage payment will be higher—just how much depends on the hike in the interest rate and the size of your loan.
If you’re hoping to buy a house this year and are concerned that rising mortgage rates will crimp your budget, try these strategies:
If you’ve got it, put more cash into the deal. You can use cash in one of two ways—or both—to reduce your monthly payments. You can make a bigger down payment, which will reduce the amount you need to borrow so that’s obvious. But, if your down payment is 20% or more, you’ll also eliminate the need to pay private mortgage insurance. Cash can also be used to pay discount points at the closing, which are equal to 1% of your loan amount. Discount points buy down your interest rate for the life of the loan. The question to ask is, how long you intend to stay in the home? The longer the expected term, the more discount points might make sense.
Ask for help. You can ask relatives to contribute to your down payment, which means you may have extra money to pay discount points. You may be eligible for a homeownership program with a lower interest rate or down payment assistance. You can also ask sellers for help covering the closing costs, so you can use your cash to buy down your rate. This is a complicated area to explore with your loan officer and real estate agent as there are rules and limitations on gift letters, down payment assistance, as well as seller contributions.
Be ready to move fast. Since mortgage rates are anticipated to rise even more this year, you may want to accelerate your home buying plans. Get your cash ready to put down on a deposit and get a completely underwritten pre-approval for a mortgage. This will help you lock-in your mortgage rate as soon as your offer is accepted.
Evaluate the pros and cons of an adjustable rate mortgage. If you plan to move again in a few years, or you know you’re getting a boost in salary or an influx of cash, you may want to choose an ARM with a fixed rate for five, seven or 10 years. You’ll have the advantage of the lower mortgage rate initially. Be sure you have a solid plan for when your loan resets to a potentially higher rate and bigger mortgage payments.
Sellers, if you’re reading this, here’s what you need to consider:
While home buyers feel the impact of rising rates, home sellers also need to be aware of how higher mortgage rates could affect the housing market. Sellers with a “starter home” that appeals to first-time buyers on a tight budget need to consult their real estate agent about market conditions for their neighborhood. As rates rise, it could be necessary to reduce their price a little or offer to help potential buyers with closing costs to encourage more offers.
(John Coile, Washington Post: https://www.washingtonpost.com/business/2018/10/08/what-consider-when-buying-home-amid-rising-mortgage-rates/?noredirect=on&utm_term=.61aefcdf62ef)