QUESTION: When is the best time to buy a home?
ANSWER: When you are ready.
So what happens when you are ready to buy a home but rates are going up? You can wish that you had been ready last year when rates were remarkably low but wishing won't do you much good.
It is important to remember that rates are still pretty low but that doesn’t change the fact that they’re higher than if you’d just bought a house even six months ago. Kind of painful to hear, huh?
What you’d probably rather hear is that rates and house prices will come down in the near future, so just hold on a little while and waiting will have paid off. Unfortunately, it’s looking like rates could go up even more in the near future, and house prices aren’t looking like they’ll definitely take a dramatic tumble.
So let’s look at some ways you can deal with rising interest rates to make your payments as manageable as possible, and maybe even save some money.
- Clean up your credit. The better your credit is, the better your rate will be. Take a look at your credit report and see if there’s anything glaringly wrong that you can have corrected. If it all looks foreign to you, ask your mortgage rep or a credit repair specialist to take a look and give you advice on anything they see that you could get corrected, pay off, or pay down in order to raise your credit score. DO NOT PAY SOMEONE TO DO THIS FOR YOU. A good lender can help you with this for free. (Please ask me for a few names of my favorite lenders.) Even if this takes a few months, it is worth the wait as you will see the results in a higher credit score, a lower interest rate and more purchase capacity.
- Shop around. Check with several lenders and see who offers you the best rate. Or go through a mortgage broker who has access to many lenders and can do the shopping for you. Be careful if one sounds way too good to be true; they could be quoting you a much better rate, but beware of the fees. If you have access to a credit union or a smaller local bank that knows you, make sure to check with them—they often have better rates because they lend their own money and / or have a closer relationship with their customers. If you go with a credit union make sure they are able to close on your time line. Some credit unions like the World Bank/IMF and State Department credit unions are very responsive. As an FYI, many listing agents will react badly if you plan to finance your purchase through Navy Federal Credit Union or USAA, based on their closing record. (Don't tell them I said so!)
- Buy discount points. Consider buying down your mortgage rate by paying “discount points.” These are fees you pay up front in order to get a lower mortgage rate. Buying a point will cost you 1% of your home loan and will generally buy your rate down by a quarter percent, although that can vary from lender to lender. Most will have a cap on how many points you can buy, and they also may offer you the option of buying lower increments than a full point. This is a good option if you plan on staying in the house for some time. Make sure to weigh how much it’ll cost you, and how long it’ll take to break even and then reap the benefits in terms of savings. While discount points will increase your closing costs, we may be able to ask the seller to pay part of your closing costs. As the market starts to stabilize we will see more sellers willing do make such concessions.
- Lock in your rate. Even though rates have already been on the rise, there’s a good chance they’ll go up even more according to recent statements by the Federal Reserve. Rate locks are typically only offered for up to 60 days, so if you’re serious about buying soon, consider locking in at the current rate. Make sure to ask your lender how much a rate lock will cost you, if anything. Also find out if they offer a “float down” option, which will allow you to get a lower rate than you locked in at, if the rates do happen to come down before you close on your house.
- Get an adjustable rate mortgage. Rates have been so low for so long that there wasn’t much demand for adjustable rate mortgages, since the 30-year fixed-rate mortgage was so affordable. But now that people are trying to save money however they can on their rate, adjustable rate loans are making a comeback. These typically afford you a better interest rate at a fixed rate, but only for a certain number of years before they adjust (as the name suggests). They could adjust up or down, depending upon what rates are when the time comes. To be safe, plan on the worst-case scenario of the rate being higher when that day comes. The length of time you have before the rate adjusts is often 5, 7, 10, or 15 years. These are perfect if you’re not thinking about staying in the house for a full 30 years. So, consider how long you plan on staying in your house, and opt for one that won’t adjust before you move so you won’t be affected by a rate adjustment at all. For instance, if you’re pretty sure you’ll move in the next decade, a 10-year ARM might be the way to go. In addition when interest rates go down again you can refinance into a 30 year (or 15 year) fixed mortgage.
- Pay biweekly. By paying half of your monthly mortgage payment once every two weeks, you end up making an extra payment per year. Doing this cuts years and lots of interest off of your loan.
- Refinance when rates go down. Keep an eye on mortgage rates. When they come down a good amount, refinance your mortgage at a lower rate.
So, even if rates aren’t as low as they were in the recent past, you still have some options and control over how much interest you have to pay. Use one, or a mix of the strategies above, and you’re bound to save money!