By Bruce Schultz, SpiritBank Mortgage Manager, SVP
Most of us are familiar with the old saying that “What goes up must come down.” However there’s another saying among mortgage bankers when it comes to interest rates—“What has gone down will eventually come back up.”
That seems to have been the case over the past 6 months. According to Bankrate.com, the benchmark Fixed 30 Year Conventional Loan interest rate has risen roughly 3/4th of a percentage point since September.
The resulting rise has obviously raised a lot of questions as well for consumers who are contemplating purchasing their first home or selling their current home to purchase a new one. Following are several things to keep in mind if you find yourself concerned about the current rates:
- Know your affordability. Having a house payment is something which you must be able to afford and know that you can sleep at night without being overly worried as to how you will make it. On an $180,000 loan amount, a difference of a half point in the interest rate is almost $53 per month or over $632 a year. If you know your upper limit of housing payment that you feel comfortable with, then make sure you are looking at homes priced with where current rates are at so you can keep your payment affordable. Sometimes that may mean putting more money down to lower the overall payment. Or it may mean taking that money and paying off higher interest debt that you have outstanding so that your overall budget remains relatively unchanged.
- Lock-in Your Interest Rate. Most lenders will offer customers the ability to lock in their interest rate to protect them against future rate increases while their loan is being processed and underwritten. In rare instances you may find a lender who can float down the interest rate after you lock however the rate lock is mainly meant to prevent you from paying a rate higher than the one you lock in at originally. Make sure to ask your lender about their interest rate lock policy.
- Consider an ARM. Adjustable Rate Mortgages, also known as “ARM” loans, have gotten a bad rap from the Great Financial Crisis that occurred nearly 10 years ago. ARM loans, while not for everyone, can still be a good financial planning tool when it comes to purchasing a home. Most lenders offer what are known as “hybrid ARMs” where the interest rate is fixed for the first 5, 7 or 10 years at a rate that is comparably lower than the Fixed 30 year rate. Then after that fixed period the rate adjusts once per year and cannot adjust outside of preset limits established by the terms of the loan note. Before going with an ARM you should take into account how long you plan to be in the home and what the potential increase of payment might be should you opt to stay in it when the loan moves into the phase of annual adjustments.
- Look at Paying Points. Discount Points are a percentage of the loan amount you pay up front as “pre-paid interest” to lower the permanent interest rate for the life of the loan. Discount Points will vary based on a host of variables including the loan program, lender, and state of the market’s current interest rates. On a side note, nearly all loan programs allow for a seller to pay at least 3% of the sales price towards the buyer’s total closing costs. Some allow for up to 6%. Those contributions can be used to cover discount points as well.
- Review your Mortgage Insurance on a Conventional Loan. If you finance your home with a conventional loan you are required to put down at least 20% to avoid carrying Private Mortgage Insurance (PMI). PMI is essentially default insurance that protects the lender in the event of a default and while many buyers don’t like paying it, the fact remains that PMI has made home ownership available to tens of millions of Americans who otherwise would not have had 20% to put down on a home purchase. Ask your lender if they offer MI programs besides the traditional monthly option. Some lenders allow for a single one time premium paid at the closing (see if your seller can help with this) that then offsets the need to pay monthly PMI. On an $180,000 conventional loan with 5% down the monthly PMI would run roughly $90 per month for a borrower with a very good credit score. If a single premium policy runs 1.8% of the loan amount or less up front then it may be a good option to at least consider paying the larger amount up front to avoid paying it monthly over the life of the loan.
For more information on mortgage loan programs, click here.