| Recent
increases in interest rates have had buyers
scrambling. When interest rates rise, so do
monthly mortgage payments, which makes buying
a home more expensive. It's hard to think
about paying more to buy a home when weeks
earlier it would have cost a lot less. What
can you do to ease the pain of higher rates?
One
option is to scale back your price range. A
less expensive house means a lower mortgage
amount and lower monthly payment. But it also
might mean a less desirable neighborhood.
This
isn't too appealing especially if you're
buying in a high-priced area like the North
East or West Coast where it's not uncommon to
pay $500,000 for a starter home. If you drop
back to a lower price range, you may find that
you can't find a home to buy in the area where
you want to live.
A
more palatable option for many buyers is to
switch mortgage products. Let's say you
qualified for a 30-year fixed rate mortgage
when rates were in the mid-5 percent range.
But, at close to 6.5 percent, you no longer
qualify.
A
popular alternative is an adjustable rate
mortgage that's fixed for five years. During
the first week of September, these mortgages
were being offered in the mid-5 percent range.
Before
signing up for a 5-year fixed-rate loan, make
sure you understand how the loan works. After
the first five years at a fixed interest rate,
the loan converts to an ARM with an interest
rate that fluctuates.
Interest
rates could be significantly higher in five
years than they are now. If so, refinancing
into a lower-interest-rate fixed mortgage at
that time may not be possible. You don't want
to find yourself having to sell your home in
what could be a down market. So, make sure you
can afford to make higher mortgage payments if
that's what you're stuck with at the end of
five years.
House
Hunting Tip:
Some 5-year fixed-loan buyers are opting for
the no-point option. This way, if the economy
slows and interest rates drop again, they can
refinance into a fully fixed-rate loan and pay
points at that time to buy down the interest
rate. This avoids paying points twice. Points
is a term lenders use for the loan origination
fee. One point is equal to 1 percent of the
loan amount.
Mortgages
that are fixed for seven or 10 years are also
available. Although interest rates on these
loans are better than they are on 30-year
fixed loans, they're not as competitive as
5-year fixed ARM loans.
Interest-only
mortgages are also gaining in popularity as
buyers search for a way to keep their monthly
payment down as rates rise. The entire monthly
payment goes to interest so none of the
principal (the amount borrowed) is paid back
during the course of the loan.
These
loans can be risky if the market softens,
prices drop and you have to sell. Some
interest-only loans convert to an amortizing
loan after a number of years. Once this
happens, you will start repaying the principal
with each monthly payment.
Sellers
who are looking for a way to enhance the
salability of their home might offer to pay
points to buy down the interest rate for the
buyers. As far as the lender is concerned,
either the buyer or seller can pay points.
However, under normal market conditions,
buyers usually pay points.
The
Closing:
If a seller agrees to pay points, the lender
may call this a credit for buyer's closing
costs. Lenders have limits of how much they
will permit a seller to credit for closing
costs.
The
purpose of this newsletter is to stimulate
thought for my clients and those professionals
with whom I network. If you are a real
estate, estate planning, taxation, financial
planning or insurance professional receiving
this newsletter, please call my office and
introduce yourself to me. I'm always
seeking to grow my referral network, and to
expose more service professionals to my client
base. I specialize in helping those
individuals looking to buy, sell or refinance
real property in the Pacific Northwest Area. |
