If you’re shopping for a new home now or are hoping to, you probably feel your heart racing a little. The word is out: Mortgage interest rates are on the rise. This means for the same size loan and house, borrowers will have to pay a higher monthly mortgage bill every month. And that’s prompting many homebuyers to hold out and wait until rates drop, which may not be the best decision.
How high will interest rates rise and how fast?
At the end of January, the Federal Reserve—a government agency tasked with preserving the health of the U.S. economy—announced that it would be raising its interest rates in mid-March. The goal they have in mind is to control elevated inflation by slowing down consumption. So what does that have to do with mortgages, you ask? Not much, at least not directly. While the Federal Reserve doesn’t set mortgage rates, they do set the rate at which banks borrow and lend to one another. A higher rate for banks makes borrowing more expensive for consumers. Long story short: The Fed’s actions have a ripple effect.
So just how high will they go? Not as high as you might think, and not all that quickly either. Even with that increase, mortgage rates will remain near historic lows so there is no need to panic.
Be aware that snagging a great interest rate isn’t just about timing. If landing a low rate is a priority for you, here are some tactics that lenders say are more essential than ever to try today.
How a mortgage ‘rate lock’ can help turn back time
Homebuyers should know that there’s a way to freeze time on rising interest rates. How? By paying to “lock in” your rate for a certain number of days. So even if interest rates spike, you get to keep the original rate. The most common rate lock is for 30 days, but there are also options for 15 days, 45 days, or more. Homebuyers pay for a rate lock and spend more money the longer their lock’s in place so you pay only for what you know you’ll need.
If you’ve barely begun your house hunt, however, paying for a longer rate lock may be worth every penny for your peace of mind. The last thing you want is to be racing around trying to find a house right before your rate lock is up!
How mortgage points can help lower interest rates
With interest rates rising, it’s also a good time to consider “buying down” your interest rate by paying points. How this works: Mortgage lenders may offer you the option to pay a lump sum upfront that will effectively lower your interest rate over the life of the loan. Generally, one discount point costs 1% of the total mortgage and will lower the interest rate you pay by around 0.25%.
It’s significant savings just for one discount point. Purchasing more upfront can save you tens and even hundreds of thousands. Many lenders will allow you to buy up to four discount points when you secure a loan.
A little-known low-interest option: portfolio lenders
Another little-known niche lender today’s homebuyers may want to consider are portfolio mortgage lenders. Unlike with most “conforming” home loans, which get resold to Fannie Mae or Freddie Mac, portfolio mortgage lenders hold on to your loan as part of their portfolio.
This gives portfolio lenders a specific advantage, and they can offer competitive rates with closing costs that are often substantially lower than other competitors in the market. You may also be able to avoid private mortgage insurance, appraisal fees, and other typical costs.
While each institution is a bit different, portfolio lending can provide a very large competitive advantage. It leaves money in the buyer’s pocket, which can turn into additional buying power.
Will more homebuyers embrace an adjustable-rate mortgage?
With rates on the upswing, many may turn to the alternative: an adjustable-rate mortgage, or ARM.
ARM loans give you a set number of years at a fixed interest rate. The period could be three, five, seven, or 10 years before they would adjust. During the fixed period, they come with an attractive interest rate that is lower than a 30-year fixed interest rate.
An ARM may be a smart choice if you aren’t planning to stay put for long. For example, you’re buying a home as a young couple but know you’ll be moving in a few years as your family expands. Or you’re near retirement age and plan to downsize and move in the next decade. You’ll want to think about how long you plan on being in the loan. This will help you determine if an ARM would be appropriate for you.
All in all, even if interest rates are rising, there are many hidden pockets where rates remain low if you know where to look.
Contact me for more information! Don’t wait to buy, there are options to get you a fabulous home for list or slightly under with interest rates that conform to your need!