One of strongest drivers of demand in today’s housing markets is buyers’ fear that interest rates will rise, and they will never again see rates as low as they are today. That’s one reason the first-time buyer volume of government-guaranteed mortgages, low down payment loans like FHA and Freddie Mac’s Home Possible Advantage program surged 18 percent in April.
Buyers who believe this may be the last buying season that they will see rates below 4 percent are probably right. However, fear of rising rates is motivating some buyers to make foolish decisions, like overpaying in multi-bid situations or buying a house they don’t really like.
With oil prices driving up inflation, it’s a good bet the Federal Reserve will raise rates again in the coming months. Now is the time to prepare current and future clients that they shouldn’t freak out over modest rate increases there are bigger factors out there that will affect their access and cost of credit. More importantly, these are issues they can do something about.
Here are five good reasons your clients should be cool about interest rates.
- Put rate increases in perspective. Rate increases raise monthly mortgage payments but probably a lot less than home buyers expect. For example, If you are borrowing $250,000 with a 30-year loan at current rates of about 3.8 percent, your monthly payment is $1,164.89. Should rates rise .20 percent to 4 percent which is what many economists foresee by the end of the year, your monthly payment enough will be $1193.54, an increase of $28.65? Paying more is not a good thing, but should rates fall you can always refinance once you have built up some equity. Plus, there’s a little consolation prize: the extra interest you pay is deductible from federal and state taxes.
- Lower your rate with a better credit score. Many buyers don’t realize that borrowers with great credit scores get better rates than those with not so great scores. Instead of rushing to buy a home today, it might make more sense to spend some time improving your credit score even if rates rise a little in the interim. Mortgage rates offered to borrowers by lenders can vary as much as a full percentage point and a half based on credit scores. By keeping balances low, paying off cards with small balances, keeping some old debt to establish a positive history, paying bills on time and paying attention to your credit reports, you can significantly improve your score—and lower your prospective mortgage rate—in just a few months.
- Get the best possible rate by locking it in. When the time comes to apply for a mortgage, timing can be everything—especially if rates are fluctuating. By locking in your rate, lenders are obligated to offer a home loan at an agreed-upon rate regardless of whether mortgage rates have changed between the time of the loan approval and the closing date. Borrowers typically wait to get a lock in until they find a home and have an offer accepted. Then they are less likely to lock in too early and miss an opportunity for a better rate before they complete a purchase, or get stuck paying extra to extend the lock once it expires.
- Give yourself some time to get a better deal. It stands to reason that the more time you give yourself to find a house that fulfills your list of “must haves,” the more likely it is you will get a better deal. You will see more listings, and their prices may fall over time. As you house hunt, you may change your mind about what you really want in a home. When you see a house you like, use time as a weapon in your negotiations. Sellers usually have shorter time frames than buyers. You will probably save much more by smart negotiating even if you have to pay a little more in interest.
- Stay cool. Don’t let your obsession with getting a low rate cause you to do something foolish like getting into a bidding war, paying too much because you feel pressed for time or settling for a house you don’t really like. If you allow yourself to get frustrated with house hunting, you can find yourself making a bad decision that you will have to live with for years.
Preparation makes all the difference. When buyers expect to encounter stressful situations, they are less likely to make mistakes. A healthy attitude towards interest rates helps them stay focused on their maximum price ceiling and the most important feature they want in a home. By taking the time to find the right deal they may pay a few more dollars in interest each month, but they will be much happier for years to come.