What To Do When Mortgage Rates Go Up

What To Do When Mortgage Rates Go Up
Sammamish Mortgage
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There are a few things in life that we can count on. One of these is that mortgage rates will never stay the same. There are periods where they are lower, and there are periods where they are higher. Sometimes rates stay in a sort of “groove” for months at a time—they’re called “channels” by investment guys—where they fluctuate very little. Other times, rates may move more dramatically.

It’s obviously great news when rates stay very low for a long time, but what do you do when you’re in the market to buy your first home and rates suddenly increase by half a percentage point? Do you give up your dream of buying? Do you bide your time, hoping they’ll come back down?

Here are some things you can do when rates move up unexpectedly.

Unexpected Rates

Take stock of your situation. If mortgage rates have increased by 5%, your payment will obviously go up. Do you know how much? Will you still qualify at the higher payment? If you are buying a $400,000 home and plan to make a 20% down payment, your payment will increase $97 per month. You should decide whether you can live with the higher payment and also whether the lender will approve you at the higher interest rate.

Settle for a less expensive house or make a larger down payment. This may seem obvious, but if you are trying to qualify for the maximum loan possible, higher rates will mean that you qualify for a smaller loan. If you qualify for a $400,000 home with an 80% loan at 4.5%, you’ll qualify for a $385,000 home with an 80% loan at 5%. If you increase your down payment by $15,000, you’ll still get the $400,000 home.

Buy Down the Rate & Consider an ARM

Buy the rate down. When a loan officer looks at a daily rate sheet, he sees many interest rates for each loan program. Lower rates will require that the borrower pay “discount points” (one “point” is 1% of the loan amount). This is called a buydown. Paying one point at the funding of the loan will lower the interest rate (“buy it down”) by about .25%.

If you are planning to buy a $400,000 loan with a 20% down payment, you could reduce the rate by .5% on the $320,000 mortgage by paying $6,400. While this is not a trivial amount, you may decide it is preferable to making a larger down payment or having a larger monthly payment.

Consider an adjustable rate mortgage (ARM). I know what you’re thinking, but hear me out. While nobody regrets getting a “traditional” 30-year fixed rate mortgage, very few people will keep a loan for that full term. People move up to larger homes. They get transferred. They refinance for any number of reasons. There are several “hybrid ARMS” available.

These are loans which are fixed for an extended period—5, 7 or 10 years are common—and adjust annually after the fixed period. These loans have lower starting rates than 30-year loans. A 5-year ARM, for example will offer a rate. 625% lower than for an otherwise identical 30-year loan. If you believe that you’ll be selling your home inside that 5-year period, or if you are comfortable with a loan whose payment will change (up or down) after that initial period, this could be a good choice. There are also 7 and 10-year varieties, with rates 375% and 25% lower than 30-year loans, respectively.

What About Taxes?

Evaluate your tax situation. You probably are aware that you can deduct mortgage interest from your income tax returns. If the deductions you can claim as a homeowner exceed your standard deduction, you’ll save money on taxes. You should consult with your tax advisor to determine exactly how much you’ll reduce your taxes. You should take this reduction into account when you make any decisions about housing and mortgage finance. You may find that the pain of a higher interest rate is somewhat alleviated by more tax savings.

Above all, you shouldn’t despair when rates move up. Mortgage finance is still the cheapest money available to us mere mortals—even when they rise above the historic low levels we have seen for such a long time. By viewing your situation rationally and considering the many alternatives, you’ll be able to get the outcome you’re hoping for.

Go over the numbers — and your choices — very carefully.

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Are you curious about mortgages, or do you want to learn more about available home improvement/renovation financing? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.