Five Ways to Think About the Rising Interest Rates
For those home buyers who have purchased a home before, navigating through the mortgage approval process once you have found your home for sale is a little bit easier than for someone who has never purchased a home before. However, figuring out what the real estate market will do and when and how to buy a home at the right time, the right price, with the best interest rate has been a little like spinning the roulette wheel at the casino over the past 4.5 years. Home buyers and refinancing homeowners have enjoyed phenomenal interest rates since the interest rate for a 30-year fixed mortgage dropped to 3.3% early in 2013. This also pushed 10 and 15-year mortgages to as low as 2.5%. Now there is fear because interest rates have risen by over a percentage point in 3 short months. So, in order to give you all of the information you will need to make the best choice for you and your family in the home buying or refinancing process, below are 5 practical facts about interest rates, where they’re headed over the next year, and how to optimize your experience in today’s real estate market if you have not already had a chance to capitalize on these interest rates.
1. The Fed bond-buying program, especially the buying of mortgage securities, has kept interest rates at 100-year lows over the past 1.5 years. Because of the stabilizing economy and the federal deficit, “all good things must come to an end.” In other words, the Fed cannot continue to keep purchasing these bonds. The buying must stop, and the economy must learn to survive on its own. So, the 3.3% on a 30-year fixed will most likely be a thing of the past with perhaps, maybe a drop back down to this rate here and there in certain market conditions. However, you, as a home buyer, must mentally allow yourself to still enjoy the current interest rate. Right now, the interest rate for a 30-year fixed mortgage is around 4.5%. Predictions state that it is not expected to rise above 5% at least until the end of 2014. So, interest rates are still historically low, and they will make a home payment affordable.
2. If you purchased your home even in 2005, you may have enjoyed an interest rate of approximately 5.75%, so refinancing your home and incurring closing costs may not be the right move as interest rates go up. However, if you are a homeowner who had a home which lost its value in the crash, you should definitely talk to your Realtor as to the current value of your home. Home values have been on a steady rise, and most markets are reporting home pricing gains each month. At least 850,000 homes gained back their value because of a stabilizing real estate market in the first quarter of this year. So, refinancing this type of loan at these interest rates would still be a good idea.
3. Don’t panic just yet that rising interest rates will bring the housing recovery to a screeching halt. While not ideal for either home buyers or builders, interest rates have to rise in order for the Fed to “stop the bleeding” of the government theoretically “bailing out” the housing industry by buying bonds. It would take a rise of about 3% to see the housing market negatively impacted by rising interest rates. Refinances and purchases may slow down slightly as the rate climbs, but once it stabilizes over a period of months, then people interested in buying a new or previously-owned home will have the confidence needed to do so. At best, home buyers should take advantage of the rates now and go ahead and “take the plunge” to buy a home before rates go back up.
4. If you don’t know anything about financing a home, then you will want to make sure to ask your banker or lender about locking in your interest rate. Typically, there is no charge to lock in at 45 or 60 days. Refinancing a home used to take 6 – 12 weeks because of all of the new government regulations on loans, but that time period has been drastically reduced as banks and lenders have grown comfortable with the new system. If the institution you are using to get your mortgage takes a long time to process loans, you should find out what the charge would be to lock in for a longer period of time – 90 – 120 days. Have your loan officer crunch the numbers to see if it is in your best interest to pay for a rate lock to save money in interest over the life of the loan. This is a service they should provide you.
5. Loan packages since the Recession have been greatly simplified because the interest free / pay later type of loans no longer exist. However, there are still fixed-rate loans and the ARM (Adjustable Rate Mortgage) out there you will need to choose between. If you have never had an ARM, or if this is the first time you are buying a home, the main thing to think about when it comes to getting the lower interest rate which an ARM offers is how long you are planning to own the home. If your purchase is temporary because of your job or because you know you will be “upgrading” in a few years, then the shorter time period you plan on owning your home, the better idea it is to get an ARM. ARM’s typically have a much lower interest rate and only allow an increase of 1% each year, while not letting the rate go higher than a stated high interest rate or “cap.” Also, if rates go down, then so does your interest rate in some cases. However, when you reach your “cap,” and you are still in your home at a higher interest rate, that is how you lose money and pay more interest with an ARM. So, when choosing the loan which is right for you, consider the amount of time you will be staying. If you plan on staying “forever,” you will want to go with a fixed-rate loan.
Be smart about interest rates, don’t panic; the housing market will still thrive at current market rates for quite some time.