The recent increase to home loan interest rates may have come as a shock for anyone that has been in the market for a new home. The resulting increase to the mortgage payment can seem daunting, and there is often a natural instinct to slow down the house hunt.
Please take a quick look at the information below before you take your foot off the gas pedal. This is still an exceptionally good time to buy a home, especially in San Diego County.
Yes, mortgage rates as of last Friday were at their highest level in over a year. 30 year fixed rates in the mid 3%’s may not be seen again for a very long time. That being said, an interest rate in the mid 4%’s is still something that anyone should be thrilled to get. As recently as the summer of 2008, 30 year fixed interest rates were averaging in the mid 6%’s. In fact, over the past 20 years rates have averaged well above 6%, and only dropped into the 3%’s in the last year. Rates are still excellent if you consider the whole picture.
Of course, the fact that 4.75% is still a great rate doesn’t mean much if the payment you can get today is more than you were planning on. Monthly cash-flow is a very powerful data point when you are considering a major purchase. Again, it may seem best to continue renting, or stick around in a home you have outgrown for just a little while longer. For some, that may be a good call, but for many, the best financial decision is to look at other options for getting keys to a new home as soon as possible.
One strategy to manage this cash flow concern is to consider an adjustable rate mortgage (ARM). These types of loans have gotten a bad reputation over the past 6 years, and in many cases that reputation was well deserved. Far too many homebuyers fell into the most extreme version of an ARM, which came with very low teaser rates and terms which actually added to the loan balance every month. Fortunately, those types of loans are long gone, and the ARM options that remain provide much more security.
For example, one type of ARM loan is called a 7/1. In this type of loan the interest rate is fixed for the first 7 years, and can then adjust once every 12 months starting in the 8th year. The loan balance goes down with each payment, and at the end of 30 years, the loan is fully paid off.
This type of mortgage becomes pretty compelling if you consider the fact that a huge number of homeowners keep their mortgages for fewer than 7 years because they either sell or refinance in the meantime. Since a 7/1 ARM is fixed for 7 years, if you are out of the loan in 6, then you would not be at risk of the rate increasing.
The key advantage of an ARM is that the interest rate on these types of loans is significantly lower than a 30 year fixed. In many cases, the rate can be more than 1% lower, making the overall monthly payment much more manageable. Even in a scenario where you did keep the loan past the 7 year mark, and the rate did adjust up, that new rate would apply to a loan balance that you had been paying down for 7 years. The potential cost of a higher rate becomes diluted every year you keep the loan.
There are a number of other options on the table as well, such as allocating some portion of the loan to an interest-only equity line of credit, or using some of your available cash to pay points to lower the interest rate. Both of these options are becoming more and more advisable as rates for 30 year fixed loans go up.
The most important thing to know is that you do have options. There is a significant amount of economic data that suggest that home prices in San Diego will continue to rise in the coming years, and the long-term trend for interest rates is likely to be higher than current levels. This is still a great time to buy a home, but there may not be time to lose.