As a result of the pandemic, interest rates bottomed out in recent years to the lowest ever witnessed in the history of the United States. A record number of borrowers happily took advantage of interest rates in the 2-3% range. But in 2022, we’ve seen a significant surge in interest rates largely due to the Federal Reserve’s attempts to combat inflation. For those who are in the market to buy a home, what actions can be taken to adapt to this new environment?
Do Your Homework.
Educate yourself about the homebuying process, shop for a lender and interview realtors. Get acquainted with the area where you want to buy and determine your budget including a cap on your prospective monthly housing expense. Think less about the rate and more about the corresponding payment itself. While interest rates may be rising, sales prices may be declining, and these two factors could potentially offset each other. Housing inventory has slowly been creeping back into the market and there are 35% more homes available today than at the beginning of the year.
As you begin the homebuying process, ensure you know your credit score, income, debts and assets, and be prepared to document all of these items. Finally, secure a pre-approval from a reputable lender. These free, non-obligatory services allow you to confidently make an offer on your desired home and compete against other potential house-hunters.
Go Where the Money Is (and Avoid the Middleman).
In this volatile environment, wholesale lenders (lenders who correspond with banks and utilize warehouse lines) are finding that their investors are “heading for the exits,” leaving them with unsalable paper and diminishing products and returns. When interest rates are low, there are a surplus of lenders willing to lend, but when interest rates rise, profits are squeezed, and some mortgage lenders subsequently go out of business. A bank, such as Univest, has money to lend, and, has federal and state requirements keeping them well-capitalized. When securing financing for your home purchase, go directly to the source lending the money rather than using a middleman.
Control What You Can.
You can’t control the financial markets and “timing” them is extremely challenging so you need to become familiar with all the financing options available to understand how they can help you navigate this rate environment. One of the most popular loan products in today’s environment is an adjustable-rate mortgage (ARM). These programs allow you to lock into a discounted market interest rate for an abbreviated time (fixed for 5, 7, or 10 years, for instance, and the payments are amortized over a 30-year term). These variable rate products feature “caps” which determine and hedge maximum adjustments to the initial promissory note rate.
Other options qualified borrowers can consider include grants, down payment assistance, loans specifically for first-time homebuyers and government loans such as FHA, USDA and VA mortgages. If you are buying new construction or building a custom home, long-term locks may also be available to protect you from rising rates. In the event you have a house to sell along with making a purchase, but your prospective seller is not accepting contingencies such as needing to sell your home before making the purchase, you can investigate “swing” or “bridge” loans which allow you to leverage your existing equity and proceed with the purchase.
Apart from loan products, another option is to pay points to buy-down the interest rate to a more comfortable level consistent with your budget. Points are prepaid interest (often tax-deductible) paid at settlement. One point is equivalent to one percent of the loan amount. The more points you pay, the lower your interest rate. If you lack the available assets to purchase points, you can try to negotiate with the seller to pay them on your behalf in the form of “assistance” or credit. Last year, in the heated seller’s market, you would not be able to make such a request, but in this changing real estate atmosphere, this may be an option.
Keep Calm and Carry On.
This market cycle, like any before it, is temporary. There are even some forecasts indicating that lower interest rates could resurface as early as 2023. Should this be overly optimistic, today’s interest rates will likely be better than tomorrow’s rates, so locking in your mortgage rate as soon as possible is vital.
It is important to keep things in perspective. When looking at the entire history of mortgage finance, the average interest rate is around 8%. Considering that, today’s mortgage interest rates shouldn’t’ be as intimidating. As the saying goes, what goes up, must come down. Even if you need to make a purchase in today’s residential real estate market, an opportunity to refinance to a lower mortgage interest rate may come along sometime in the future.
There is a lot to navigate when buying a home especially in a rising interest rate environment. Working with an experienced mortgage loan officer, like those at Univest Home Loans, can help guide you through the process and determine what financing option is best for you. Contact us today at 877-723-5571 or email@example.com to have a conversation about your unique needs and making your dream of home ownership a reality.
Univest Bank and Trust Co. is Member FDIC and an Equal Housing Lender. NMLS #415882