Unless we have been living under a rock for the past few months, it is impossible to escape the news of rampant inflation and rising mortgage rates. The recent increase in home values and mortgage rates is starting to slow the overheated real estate mortgage.
Since the beginning of the year, the Fed has been aggressively increasing rates. Their stated goal with these rate increases is to slow inflation and cool off the housing market. Interestingly April’s new home purchase contracts still came out higher compared to April 2021. Most indications are that the April 2022 reading may be the last signs of the frenzied market. If that is the case, we will see these numbers start to drop – possibly precipitously – in the coming months.
Since we are now entering a period of increased interest rates, what are the best strategies to maximize the financial benefits of having a mortgage?
1. If You Are A First-Time Homebuyer:
As a first-time homebuyer, this may be hard to hear but rising interest rates can be a blessing in disguise. Yes, your total monthly payment will indeed be higher on the same mortgage amount compared to six months ago. Nobody likes a higher mortgage payment, especially, when the cost of everything is also increasing. It is important to keep in mind, though, that a mortgage is a financial tool. A mortgage is often the most powerful and useful tool that you have in your financial toolbox.
Many first-time homebuyers think of a 30-year mortgage as a rate and payment that they will be saddled with forever. Always remember, that a mortgage is a short-term tool. The average life of a mortgage is about 4.5 years. Even if rates are up now from a year or so ago, there will always be an opportunity to refinance to a lower rate and payment.
Even if mortgage rates are heading up over the next few years, rates never move up in a straight line. We may see higher rates two years from now. Even so, we will most likely see a few dips before we get there. Sometimes the rate dip may be short-lived, so it is always important to stay in touch with your mortgage broker. Don’t worry, a great mortgage broker will always stay in touch with you. Always make sure you are working with a great broker!
The benefit of higher mortgage rates is that they lead to a cooling real estate mortgage.
Why Is a Slowing Real Estate Market Beneficial?
A cooling real estate market means there will be less competition for each listed property. During the run of the summer of 2020 through 2021 homes on the market would often see 10-15 offers each. First-time homebuyers would often lose out on a good offer to other offers.
Typically, first-time homebuyers are in the lower down payment range of 3%-5%. Buyers who were upsized and sold their prior homes often realized huge gains in their current homes. They were able to take those gains and offer larger down payments on the new home.
Losing out on offers was not the only issue for first-time home buyers. To get an offer accepted, first-time home buyers often need to waive home inspections. They were also agreeing to cover the cost difference if the mortgage appraisal came in low.
Anyone who has consistently followed my advice knows that I never suggest waiving a home inspection. Waiving a home inspection is often letting the seller off the hook for repairs that could be costly in the future. I am ok with waiving an apprisal if the buyer is comfortable. I would never suggest covering the difference if the appraisal comes in low.
What if the Appraisal Comes in Low?
In a standard market when an appraisal comes in low, the buyer and seller can negotiate on the difference. There are times when as a buyer it would make sense to cover the difference on a lower appraisal. Covering the difference in value should always be the buyer’s choice. If the numbers no longer make financial sense based on the low appraisal a negotiation should always occur. A buyer should never be forced to cover the difference if it is against their financial interest.
2. If You Currently Own a Home With a Mortgage.
If you currently have a mortgage, there is a good chance that you purchased or refinanced your home over the last few years. In that scenario, it makes sense that you have a historically low or near historically low mortgage rate. You may think, I have a very low rate there is no benefit to me at this time to refinance.
Check Your Consumer Debt
It is great to have a very low mortgage rate. If you are in that boat, and you have little or no other consumer debt – you are in great shape and the below does not apply to you. Most mortgage holders are not in that position. It is rare to have a mortgage with a low rate and little or no consumer debt. Some people who were first-time home buyers may have come into their purchase transaction with little other debt. Keeping debt low before the home purchase put these clients in a perfect spot to purchase their first home.
Talk to any first-time homebuyer a couple of years after they purchase their home and they will all tell you about all the expected and unexpected costs. After buying a first home, homeowners always want to fill it with furniture and decorations, and home improvements. Most first-time homebuyers experience an 18% increase in consumer debt in their first two years.
A cash-out refinance can pay off your existing mortgage and provide additional cash to pay off other debt. Over the past couple of years, homeowners have realized historic property value gains. Many mortgage holders are in a position to take a cash-out to refinance to consolidate debt.
When mortgage rates go up, we always see credit card rates move up much higher. We are now seeing credit card rates hit 15% -20%+. Many clients can exchange their current mortgage rate for a higher mortgage rate. Although the new mortgage rate is higher than the current rate, it is much lower than the consumer debt rate. The cash-out refinance often results in hundreds of dollars in monthly savings.