Mortgage rates of been on the rise lately, with the most recent tear higher garnering quite a bit of attention. The 30-year fixed rate is approaching 5%, a number that hasn’t been seen since around 2011. Remember, while rates are high relatively speaking, rates are still lower than what was observed in the 70s, 80s, and 90s.
The expectation is that rates will continue to rise with economists forecasting we will see 5% by the end of 2018 and could possibly see 6% by the end of 2019. Why are rates rising so rapidly? The most recent jobs report was indicative a strong economy with unemployment the lowest it has been in decades. A strong job market translates to a strong economy, and a strong economy means rising interest rates.
So, what do rising rates mean for home buyers and the housing market? Remember the following
You Have Mortgage Options
When headlines and the press speak to mortgage “rates” they are referring to the 30-year fixed rate. This is the most expensive mortgage product as it has the longest built in protection period. But what if you do not plan to be in the home for that long…why pay a premium for time protection that you may not need?
Many buyers are shocked to see all the various mortgage products that exist when they sit down and discuss their needs and options with a Mortgage Broker. A qualified Mortgage Broker will be able to advise on which product makes the most sense given your qualifications and time horizon.
Control What You Can
There are aspects that you can control when it comes to financing your home and getting the best rate possible. Two of the biggest influencing factors are 1) down payment and 2) credit score.
Down payment:
The amount of money you put down on a home is one of the biggest tools you can use to lower your monthly payment because the more you put down, the less money you are borrowing. We understand getting a substantial down payment can be challenging, especially for first-time homebuyers who may be younger and faced with high student debt.
It is also important to remember that any down payment 20% or greater will remove the need for Private Mortgage Insurance (PMI) which can be a substantial savings on your monthly payment.
Credit Score:
If you have ever borrowed money, you know the importance of a strong credit score as it relates to getting the most favorable rates. Yes, you do not need the best credit score out there to qualify for a mortgage, however, the better your score the better the rate you will receive which means the lower your monthly payment will be. Turning a credit score around can take some time, so if purchasing a home with financing is in your future and your credit is damaged, start working hard now to get it on the rebound.
Tax Benefits
There are tax benefits to having a mortgage which are something to consider. While many do not know exactly where they stand in terms of tax liability given the new changes to tax code, we expect to get more clarity after filing 2018 returns.
With that said, interest paid on a mortgage is generally tax deductible. Under the new tax laws, if you take out a new mortgage, you can deduct up to $750,000 in mortgage interest from your taxes. In a sense, this makes your effective mortgage payment lower as you are getting benefits when you file your taxes…something to keep in mind.
Questions about taxes? We are not tax advisors and would defer you to your qualified tax advisor who has a full picture of your tax liabilities.
If You Are a Seller
Rising mortgage rates may not only impact buyers, those actually taking on a mortgage, but could also have an impact if you are a seller, so it is important to say abreast of market trends.
Sellers – enlist the advice of your broker in regard to pricing. Your broker will be attuned to trends in the neighborhood and know if impacts are being felt as a result of rising rates. This is especially important for sellers who are selling property that is more likely to appeal to first-time home buyers who are more pressed for cash and concerned with monthly payments. Will a reduction in price make your property more attainable for them?
It is important for sellers to understand the buyer’s perspective given we are currently in a Buyer’s Market. Buyers are faced with a one-two punch of rising rates plus increased home prices over the past few years. Price your property according to what the market is dictating if you want to sell.
What does it all mean? We feel rising rates will certainly have impact on some home buyers that are on the cusp of affordability, however, we do not feel that rates are at a point where it could completely stall the market and put large downward pressure on pricing. In fact, some pent-up demand may be spurred to “jump” in to the market as affordability (of monthly payments) becomes a concern. People see the pace at which rates are rising and do not want to be priced out because of higher rates in a few months.