Rates too High? Here are Some Steps to Take In the Interim

Many are worried about higher interest rates, which have priced many out of the housing market. The situation was exacerbated today when the Fed raised rates another .25 points to the highest level in many years. First, it is important to note that high rates should not necessarily preclude you from buying now based on a couple of other factors. When buying a home, there are essentially two main concerns, beyond questions around the home and neighborhood, which are the rate and the purchase price. You cannot change the purchase price once you close escrow, but it is possible to change your rate.

Given the constraints on inventory that are likely to persist for at least a few more years, it is unlikely prices will fall substantially, and evidence suggests they will instead continue to rise. So, if you are considering a purchase now, you should consider these factors in determining whether you should wait for rates to fall: 1. How long do you plan on staying in the home? If the answer is for an extended number of years, then refinancing when rates fall will be less of a financial hit and it might make sense to purchase now, 2. Can you afford the higher payments until the rates fall?

Homeowners

For current homeowners who are “rate-locked,” in other words unwilling to sell their home with a lower mortgage rate and then purchase a new home with a higher one, which comprises a large percentage of current homeowners, as I mentioned a couple of weeks ago, there are some things you can do in the interim to prepare for that sale

1. Renovate: while rates are higher on home equity loans as well, they often come with better terms and if taken strategically, can help you increase the value of your home when you do sell, while improve the quality of the home while you are still in it. Things like painting your home's exterior and improving your landscaping can boost curb appeal, providing strong return-on-investment.

2. Refinance: are you crazy, you might be asking me right now? But not refinancing for the rate; in this case I am suggesting the possibility of refinancing to a shorter term mortgage, which generally offers lower rates. This would have to be viable financially, but could be a way to improve you profit upon selling in the future

3. Rent Your Home: Homeowners can "get a HELOC on their current home for what they will need as a down payment and closing costs on the home they want, and then also get pre-qualified for that purchase," says Bret Ceren, associate broker at Platinum Living Realty. "Typically the only extra step needed is that they have a signed lease in place on their current home before closing on their new home, but the tenants don't need to move in until" the homeowner moves out, he adds. In this scenario, you can refinance your new home when rates come down and will now own a rental property that can generate monthly passive income. This extra cash flow can also help offset some of the additional costs of buying a new home at a higher mortgage rate, though it is dependent on the rental income in comparison to your mortgage and HELOC costs.

For Future Buyers

1. Build Savings: the more you can put down on a mortgage, the lower your monthly costs. While you do not need 20 percent to purchase a home (one of the biggest persistent myths believed by the public), there are benefits to reaching that plateau, including the absence of PMI (private mortgage insurance)

2. Improve Your Credit Score: one of the key factors in determining your interest rate is your credit score and there are short and long term strategies to raise your score. Among them is to reduce your debt, particularly as a percentage of available credit.

3. Buy Anyway, as a mentioned above, if you want to get into a home, with all of its advantages, now, you can simply purchase at the higher rate and just plan to pay closing costs on the loan by refinancing in the future.

Let me know if you have any questions around these choices or would like to speak with my lender about your options in more detail.