With Rising Interest Rates

With interest rates on the rise after the Federal Reserve boosted rates in December – and more increases likely on the horizon – is now still a good time to buy a home?

“In terms of the rate, yes,” says Nela Richardson, chief economist for the national real estate brokerage Redfin. Since the presidential election in November, the rate for a 30-year fixed-rate mortgage has risen from 3.68 percent to 4.2 percent, according to Freddie Mac’s most recent weekly mortgage survey. “That’s so low relative to historical averages.”

Homebuyers leery of rising rates might need some perspective. Interest rates have been mostly below 5 percent since late 2009. The idea of paying 12 percent interest on a home mortgage sounds preposterous, but rates were above 7 percent most of the time from 1971 to 2001, rising to 18.16 in October 1981, according to Freddie Mac. Rates did not dip regularly below 6 percent until 2008.

“We’re dealing with a whole generation of homebuyers who’ve never seen a rate above 5 percent,” Richardson says.

Analysts expect rates to rise this year, but probably not by more than one-half to three-quarters of a percent, which means rates are predicted to stay below below 5 percent for a 30-year fixed-rate home loan.

“I do think that rates will be more volatile,” Richardson says. But, “when I say volatility, I don’t mean huge swings.”

That means that a home mortgage will still be a good deal for most homebuyers this year.

“If you can get a mortgage for 30 years at 4 or 5 percent, compare that to your credit cards,” where interest rates are usually in the teens or 20s,

says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York.

One reason rates remain low is because the Federal Reserve has been buying significant amounts of mortgage-backed securities since 2009, and that’s likely to continue. “When they stop, obviously interest rates have to go up,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area.

The Fed also has said it plans to raise the federal funds rate – the rate at which banks loan to each other – several times in 2017. But that in itself does not raise mortgage rates, though it does affect the overall economy.

What could cause a significant change in mortgage rates is a big unforeseen event such as a major shift in U.S. economic policy, a terrorist attack or an international crisis.

“Any unexpected disruption in the market will cause rates to jump,” Rodriguez says. “There are always factors beyond the normal economic indicators.”

A small change in rates often means a small change in mortgage payments. For a $200,000 mortgage with a 30-year fixed rate at 4 percent interest, the monthly payment would be $954.83. At 4.5 percent, the payment goes to $1,013.37, and at 5 percent you would pay $1,073.64. Just for comparison’s sake, at 12 percent, the payment would jump to $2,057.23.

The effect of higher rates is often felt most by those who are stretching their budgets to buy or those who have other debt and are struggling to qualify for a loan. Rising home prices could have a greater impact. The median home sale price rose 5.5 percent last year, and Redfin predicts a 5.3 percent increase in home prices this year.

“The problem for first-time buyers: It’s not just the rates, it’s the rate plus the price increases,” Richardson says. “It’s the combination of the two that’s the problem.”

Fleming advises homebuyers to consider paying points upfront to get a lower rate. Essentially, you are paying cash to buy down the interest rate to a lower point. But the payment amount is not the only number of importance. The other key number is how much principal you will have paid down by the time you sell.

“The lower the interest rate, the more of your money that goes to principal,” Fleming says. “The question to ask is, what is the upfront cost [for points] vs. the interest cost?”

“The easiest way to get your interest rate down if interest rates are rising is to pay points,” he adds. “If you have the cash, this is the best thing you can possibly do is pay points and get that interest rate down.”

No one has a crystal ball, but the chances are that 2017’s mortgage rates will be lower than future rates. “Eventually rates are going to go up,” Rodriguez says. “When is eventually? No one has any idea.”

Credit score. How good is your credit score? Those with higher scores get better rates, and you need a score of at least 740 to get the best rate from most lenders. If you’re not at that level, you may want to start making improvements to boost your credit score.

Down payment. You don’t need to put 20 percent down to buy a home, but if you do, you won’t have to pay private mortgage insurance, which protects the lender if you default. That can add $30 to $70 for every $100,000 borrowed to your monthly payment, according to Freddie Mac. Some lenders offer 80/10/10 piggyback loans, which allow you to get an 80 percent first mortgage and a 10 percent second mortgage, with no PMI required. Then you would pay 10 percent down. A bigger down payment also makes your payment lower because you are financing a smaller amount.

Points. You can pay cash upfront, called points, to lower your mortgage rates. It’s important to do the math for your situation to determine whether that makes financial sense, but it can for many homebuyers.

Closing costs. Not all lenders and not all closing agents charge the same amount. Shop around for the best deal on closing costs. Many fees are negotiable, and they can vary significantly depending on where you’re buying your next home.

Home price. A more expensive home obviously means bigger payments. One of the simplest ways to lower your payments is to choose a less expensive home, even if it means giving up some of the features you want.

Source: U.S. News & World Report