Through the first 6 months of this year all we’ve been hearing about is rising interest rates, higher inflation, a slowdown in the economy, and the can’t miss drama that is Johnny Depp and Amber Heard. (When does Season 2 come out?). Hopefully everyone has found other forms of entertainment now that the trial is behind us and even though rates are up from when they were last year, there are many people taking advantage of this market. Here are a few ways you too can win in today’s environment.
What’s the Deal with Rates?
Yes, rates are higher than where they were last year, but believe it or not, they’re still historically low. Check out the chart below showing the average 30-yr fixed interest rate through the decades. Having a little perspective on where rates are and factoring in the advantages of homeownership from tax deductions, building equity in a home, and locking in a payment as opposed to praying your landlord won’t raise your rent, are all factors to be reminded of in this market.
Paying Attention to the Payment
I spoke to a buyer a few days ago who is in the process of buying a coop. When we got to the part in the conversation of what her monthly payment is going to be, she was shocked. “Wow, that’s lower than what I expected and lower than my rent,” she said. “What’s the interest rate on that?” she then asked. When I told her the rate would be in the high 5% range, her immediate reaction was the rate seemed too high, almost immediately forgetting about how she could comfortably handle the payment. Psychologically, the interest rate being under a certain amount is super important, but in reality, your monthly payment is where the focus should be.
Marry the Home, Date the Rate.
Where your rate and monthly payment is today, doesn’t necessarily mean that’s where it’s going to be tomorrow. Once you own the home, your payment is locked in and fixed for a certain number of years. If rates increase, that won’t impact your housing payment at all. If on the other hand, rates drop, you will have the opportunity to refinance and lower that rate and monthly payment. Oh and one more thing… home appreciation rates have been strong. The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 2.1% in April and 20.4% year over year. (there’s always a lag with this data). This annual reading is basically flat from the previous report…but still blistering hot.
Arms Have Legs
Applications for ARMS (adjustable-rate mortgages) have increased this year and for good reason. ARM rates could be 1% lower than a 30-yr fixed rate, or even more. Keep in mind, there are usually three types of ARM loans: a 5-year option, a 7-year option and a 10-year option ARMS and they’re all 30-year loans, they’re just broken up differently. For example, let’s take a 7-year ARM. The rate for this program would be fixed for 7 years. If you wanted to refinance, payoff the loan or sell the property within that time frame, you can do so. (Please check with your lender to ensure there are no pre-payment penalties.) Starting in the 8th year, until the 30th year, the rate will change every year. We don’t know where rates will be in 8 years, but upfront on all of these loans, we will know the maximum the rate can go to. Statistically speaking, people will refi, payoff their loan or sell their property every 7 years.
Paying Points Can Score You a Great Deal
When applying for a mortgage, make sure your lender talks about the options to pay points to lower the rate. Points are just fees, plain and simple and 1 point represents 1% of the loan amount. Depending upon what’s happening in the market, it may be in your best interest to pay points to buy-down the interest rate. You could pay a half a point or two points or more, but whichever option you choose, it’s imperative to have your lender calculate the break-even point, which is the point at which the cost (the points) and the savings (the differential on the monthly payment between the rate with no points and the rate with points) are equal.
As you can see, there are several ways to look at this market and take advantage of what’s happening when others are sitting on the sidelines. If you’re interested in a free consultation to discuss your scenario, please feel free to reach out and I’d be happy to chat with you.
Vice President of Lending
CrossCountry Mortgage, LLC
Personal NMLS385124 Branch NMLS1601092