While reviewing my twitter feed yesterday I stumbled upon an article that caught my eye. I use twitter as my parent’s generation would have watched the Huntley–Brinkley Report for their nightly news.
The title of the article was The Experts: How to Deal With Rising Interest Rates. That piqued my interest. Of course, I thought they were speaking of mortgage interest rates.
The article actually addressed investors in the stock and bond markets and the best dividend strategy given the threat of rising interest rates.
Even so, I read the article. If home buyers are not investors, what are they? They put up money (down payment, closing costs and a monthly payment). They have a risk factor to consider and like many investors who use margin they have a monthly obligation because most buyers use the leverage of a mortgage loan.
I wanted to see how much of the wisdom from the Wall St could be utilized in the real estate and mortgage world. Many of the comments are worth reviewing in light of the markets response to the possible elimination of Qualitative Easing.
It All Depends on Your Portfolio and Tolerance for Risk
I use the phrase “it depends” frequently. In this case it is very useful. Often, I am asked what’s the rate for a 30 year fixed mortgage? You will then hear, it depends. It depends on your middle credit score, the percentage of equity, whether it will be a primary residence or an investment property, how long the lock needs to be for (delayed settlement), is it a condo? If yes, more than four floors? Will you waive escrows? Is it more than one unit? Did you want to buy the rate down? Did you need a lender credit at closing? The list seems endless. All these details affect price and therefor your rate for a 30 year fixed mortgage. It depends on who and what you are.
I suggest to my borrower clients that they use the “pillow test” to judge their tolerance for risk. When you lay down at night and think about a new mortgage do you lie there awake and worry or do you sleep like a baby? That says mouthfuls about the mortgage and transaction that you are considering.
Agonizing Isn’t Going to Help
Don’t worry unnecessarily.
If you are transferring into the area and need a new roof over your head or are already under contract to purchase a new home, you must accept and embrace the current market environment. It is what it is.
Even if you’re not in one of the the camps above, you still need to ask yourself with current rates is it still worthwhile to move or refinance. Just two years ago or so people didn’t think rates would get below 4%. In 2010, we wondering if they would drop below 5%. We still have relatively low rates.
Consider Income-Oriented Portfolios With Low Duration
This really doesn’t have any correlation to the home buying process except for the issue of income orientation and the duration of how long the initial mortgage rate will be fixed. You will hear more about adjustable rate loans if rates stay where they are or move higher. The duration of how long you can enjoy the initial interest rate is important and something worth considering.
You have to be comfortable with the prospects of your income steadily continuing or being consistent. Servicing debt is a cash flow issue. Having a cushion of cash sitting in an account for emergencies is an excellent strategy if you can pull it off.
Focus on What You Can Control
This is my favorite.
You can control your offer and the terms you are willing to live with. You can control to some extent the timing of your transaction. You can control the amount of risk you are willing to endure. You can’t control interest rates but, you can control your interest rate by locking in for a period of time.
High(er) Rates Aren’t the End of the World
Rates have been at historical lows for a long, long time. It’s to be expected that rates will rise at some point. However, no one is anticipating unexpected sharp increases in interest rates at this time. And rates are still historically low.
Shorten the Duration of Your Bond Portfolio
The only parallel here is to consider shortening the duration of the initial rate for your loan. Maybe an adjustable rate mortgage, perhaps a 15 year fixed mortgage. Each of these will get you a lower rate than the 30 year fixed for the same upfront cost. Only one of them gets you a lower payment and the ability to qualify for a larger mortgage.
Hurry Up and Refinance
If you haven’t taken advantage of the lower rates yet now is the time. There will be some volatility in the markets over the coming months presenting you you with an opportunity to lock. Don’t wait to start! Get the process rolling and pick your moment!
What Goes Up…
You know the rest of the saying: Must come down! This could be the sleeper in all of the comments. Don’t be surprised if mortgage interest rates settle back down around 4% for a long time.
As the creator of the comment continues, “There’s way too much worry in the world about rising interest rates. Leave it alone… Interests rates go up and interest rates go down.”