What Should Home Buyers Do During Periods of Rising Interest Rates?

With a stronger economy, interest rates have been going up over the past several months. How does this affect buyers? What should home buyers do? What types of loans should home shoppers consider using? We asked 19 experts and received the best advice for home buyers during periods of rising interest rates.

Check out the responses below from Realtors, lenders, attorneys, investors and bankers.

Elysia Stobbe – Elysia Stobbe Inc

Home buyers should consider buying a home if they feel confident they are going to be in the same job and the same area for two to three years. It also helps if they do not anticipate any big life changes such as marriage, growing family or down sizing or retirement. Also, enjoying where you live is very important as well.

During a rising interest rate environment, conservative buyers should consider fixed rates or at least a 5 year ARM if they feel they will be in their new home for less than 5 years. This will help keep their monthly principal and interest payment the same.

To get the lowest-cost mortgages buyer should do everything they can to have their credit in great shape, as credit score is the biggest determining factor a buyer can control that drives the interest rate.

Adam Sbeih – SOCOTRA CAPITAL

One great idea in a rising rates environment is to assume the loan of the seller. If the homeowner’s lender approves, you can get the lower rate that the seller locked in years earlier. However, this does depend on lender and the terms of the loan itself, as not every loan can be assumed.

Jonathan Faccone – Halo Homebuyers L.L.C.

As an agent and investor, I encourage home buyers to purchase sooner than later because of the inevitability of climbing interest rates. It’s better to lock in now then wait as it becomes increasingly expensive. I would stick with conventional loans because they still offer a low down payment option with less red tape, and of course shop around for the best rate.

Bruce Ailion – RE/MAX Greater Atlanta

Buying a home in a rising interest rate environment does not necessarily alter the affordability factor of a home. As interest rates rise, sales slow and prices level off and may decline. Buying at a higher rate and lower price makes little payment difference than buying at a lower rate and higher price.

Your Realtor and lender should create an analysis to compare this relationship. The benefit of buying at a lower price and higher interest rate is when interest rates decline you can refinance and end up with potentially a lower total cost that if you purchased at a higher price with a lower interest rate.

Nancy Brook – Billings Best Real Estate

Should home buyers buy a home when interest rates are rising?

With the economy heating up, experts are predicting an increase in interest rates over the next six to eight months. With both interest rate and home price increases, a buyer will pay more for the same home next summer. In northern climates, fall and winter months can be an ideal time to purchase as there are fewer buyers looking and more motivated sellers.

What types of loans should buyers consider?

The best loan depends on the individual buyer’s situation.

If a buyer has a large down payment, a conventional loan is the way to go as private mortgage insurance (PMI) can be avoided. Private mortgage insurance can add hundreds of dollars to the monthly payment.

If a buyer is seeking a rural property, rural development (RD) could be a great option as it requires no down payment. These loans will include PMI until the equity in the home hits 20 percent. RD loans require homes to meet minimum standards so all homes will not qualify.

The Veteran’s Administration (VA) is a great option for those who qualify. VA loans require no down payment and have no PMI. Interest rates are typically lower than conventional loans. Like RD loans, VA loans also requires homes to qualify for the loan.

FHA can be a great option for those with a lower credit score. Borrowers can have a credit score as low as 580. Interest rates can be lower than conventional loans. PMI, however, is now added on the payment for the life of the loan. Like RA and VA, FHA requires that homes meet minimum qualification standards.

What should home buyers do to get the lowest-cost mortgages?

Buyers should explore the different loan types and see what works best for their particular situation.

John Myers – Myers & Myers Real Estate

In a rising interest rate, it is critical to obtain a fixed rate mortgage. An adjustable rate mortgage will create some serious problems for you in the future.

The Federal Reserve has been raising interest rates and has publicly stated the plan is to continue to raise interest rates. If you are considering purchasing a home, it will be cheaper to buy now than it will be in a few months or next year. As interest rates increase so does your house payment. As interest rates rise, mortgage amount you qualify for will decrease. If you wait too long, you may get priced out of your dream home.

It is critical for home buyers to search for the best mortgages available. Many home buyers do not shop for their mortgage. All home buyers should shop at least three different mortgage companies before making a decision on the best mortgage for them.

There are two components to a mortgage, the first is the interest rate the lender is charging. Interest rates change on a daily basis so check the interest rate at each lender on the same day. The second major component is the cost to originate the loan. The origination fees for each lender can vary wildly. Make sure you ask the lender, “how much are you charging me to originate this mortgage?” Many of the online lenders have lower interest rates and origination fees than a brick and mortar lender. Make sure any lender you are working with is licensed to work in the state you are repurchasing your new home.

Ralph DiBugnara – Home Qualified

Rising interest rates and inflation currently have spurred more buyers to get off the sidelines with a sense of urgency. But it is decreasing spending ability so eventually buyers will either have to compromise on what they want or lower their own expectations based on what they can afford. The positive side is with a higher return on invested funds because of increased rates we will also see more products come to market that will enable more buyers to qualify because of expanded guidelines.

Now is a great time to pursue investments that produce rental income. As rates and prices rise so will rental prices, but investors should be careful not to overpay for properties. Because of a national shortage of homes for sale bidding wars have ensued. Buyers should be careful not to overpay for a home today that will not yield what they need on rental income to profit.

The biggest risk currently is overspending and / or overpaying for a property. Buyers should create a budget, stay patient in their search, and in a tough market they may have to compromise on what they want to get good value for their investment.

Karl Jacob – LoanSnap

Rising interest rates might actually mean good news for homebuyers. First, because investment buyers are deterred from high rates and therefore are not buying property. This could leave more property on the market available for prospective homebuyers, which they otherwise may not have been able to get due to competition. Also, increased rates could cause homes to be on the market for longer which could drop prices.

Home buyers should consider all types of loans, not just loans with the lowest interest rate. It’s important to fully understand your unique financial picture before making such a big commitment. Low interest rate mortgages aren’t always best, they have high down payments that cause people to deplete savings.

To get the lowest-cost mortgages, home buyers need to understand your financial picture. Technology can help with this, it will tell you what’s best for your individual circumstances, which is different from other home buyers.

Vincent J. Averaimo, Esq. – Milford Law

As a real estate transactional and litigation attorney, my clients have expressed to me that their decision as to whether or not to buy a home really depends on where one is in their life. For example, are you starting your first job and just “planting your roots?” Have you been at the same job for several years and see yourself staying? Does your lifestyle require flexibility? Whether one buys a home or not will depend on the answers to the above question, not necessarily whether or not interest rates are rising.

Rather, if you are ready to buy a home and interest rates are rising it probably behooves a buyer to get pre-approved and search out acceptable homes to put an offer in on because the cost of borrowing money is increasing and could limit what one can now afford. With interest rate volatility, a buyer should be sure to apply for and obtain a pre-approval or pre-qualification from his/her lender so they know exactly how much they can afford and an interest rate lock once they locate the home they wish to purchase and is accepted by the seller. This way, the buyer will know exactly how much home they can afford and when that home is found, they do not have to be concerned with the rising interest rates over the next 60 to 90 days it takes to close on the home.

When interest rates are rising it is a good idea to consider a fixed rate loan. The fixed rate loan has not been as popular as it was in the past. The main reason for that was that interest rates were staying low so an adjustable rate loan was not as risky and at some times more beneficial than a fixed rate loan. However, if interest rates are going to continue to rise and one selects an adjustable rate loan budgeting may become an issue because the principal and interest payment would go up as the interest rates rose depending on the change date of the loan and the frequency in which the interest rate adjusts based on prime.

My clients have found that the lowest cost mortgages come from the local and regional banks as opposed to their online counterparts. The application fees are less and the fees overall are less. However, one must be aware that the regional and local banks generally like to do business with individuals with a strong credit score. If your credit score is somewhat damages or not where it needs to be an online broker or large nationwide lender may be the way to go because they have much more underwriting flexibility.

Tammi Lindley –The Lindley Team at Mortgage Express

For the third time this year the feds have increased interest rates causing mortgage rates to rise. For those in the market to purchase a home, higher rates reduce affordability by lowering the price range of homes that buyers qualify for. Although this may seem like a negative, when affordability is on the decline, home sales also decline giving buyers a bargaining edge. Additionally, fewer buyers are likely to be competing for homes, minimizing the chances of a bidding war.

As long-term mortgage rates rise, buyers might look again at Adjustable Rate Mortgages (ARMs). Depending on how long a buyer plans to be in the home, a 5-year or 7-year ARM might offer a lower rate and allow buyers to afford a higher priced home. If an ARM loan doesn’t suit a buyer’s long-term goals, consider buying down the interest rate with discount points as a way of qualifying for a more expensive home.

The historical average 30-year fixed mortgage rate since 1971 is 8.21%. We have a long way to go before rates reach that level, so we are still in what’s considered a low interest rate environment.. Homebuyers should not be discouraged. Increasing interest rates generally correspond with a strong and growing economy, so look for increasing wages to offset increasing mortgage payments, and remember, rents are also on the rise so staying out of the housing market is probably not the answer.

Ben Creamer – Downtown Realty Company

“The residential real estate market is directly affected by variations in interest rates,” said Ben Creamer, co-founder and managing broker of Downtown Realty Company, a full-service brokerage specializing in luxury residential in downtown Chicago. “A rising interest rate can affect all players in the spectrum, from the builder to the buyer, as it ultimately increases the cost of the home for everyone. However, while interest rates are rising now, it is important to keep some historical perspective and recognize that our current rates are still comparatively low.

For buyers, the interest rate directly affects their monthly mortgage payment and their overall purchasing power, so locking in a lower interest rate generally means the buyer can afford to spend more to purchase a home. For those in the process of building a home, the conventional loan interest rate can vary as construction is underway, so stay vigilant and lock in the conventional loan rate as soon as possible. For current homeowners with an ARM, it may be a good time to lock in a longer-term rate.

One way to offset rising interest rates is to request closing credits from the seller. This will reduce closing costs and the savings can be used to pay down the increased borrowing costs.

Financially savvy home buyers will consider their entire portfolio of assets and factor in the return on outside investments when considering how to best structure a mortgage. For example, it may be prudent to pay down the principal of a home loan if other financial investments are not paying out more than the mortgage rate.”

Jamie Klingman – Boutique Realty Florida

Buyers can be protected from rising rates in a few ways. One is to do a conventional loan, with a locked/fixed rate. Adjustable rate mortgages are more susceptible to the market swings. They can also be sure to buy a home that is within their budget, so if there are some fluctuations in their payments, they are still able to stay in their home. As rates rise, they also can buy homes in which they can put more down, so that they are paying less interest over all. And finally, even making one extra payment a year will dramatically lower the overall interest paid.

Steve Novak – Walden Novak Group

Purchasing a home, if you can afford it, is an investment in yourself and your future, and is always a good idea. Rising interest rates, while not ideal, can actually create an opportunity for savvy buyers. The housing market is just that – a market. Interest rates are just one part of the equation.

Often what happens when interest rates rise, is that buyers get spooked and exit the market. This softens the market and can actually create opportunity. Less buyers equals less demand, and can result in homes selling for less. Thus, the money lost to interest can be made up or even surpassed by buying a home at a lower purchase point. With a softer market, often sellers are willing or forced to accept lower offers.

Seth Lejeune – Ask Seth Anything

Interest rates are liable to price people out of their dream home. If an incremental difference in interest rates is the difference between buying a home and not, then it’s probably a good idea to look to see whether you can afford a home in the first place.

One thing I tell my clients who have some extra money laying around is to buy down points on their mortgage. This is essentially paying more closing costs for a lower monthly payment. At certain price points, this can be very advantageous. As I said, you need to be able to part with that money. No one wants to move into a house with minimal funds to spend on all the fun stuff upon moving into a home.

Francisco Alex Escobar – Optimus Realty Group

As a realtor that works with lots of first time home buyers, I have seen how demoralizing it can be for a buyer to suddenly realize their maximum price just dropped by thousands of dollars because of rising interest rates.

We start with the serenity prayer: “God grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.” Even if you’re not the religious type, this is helpful.

We can’t control (or predict) the rates or what’s available on the market, but the buyer can control their criteria and their emotional state. This is how I try to share some wisdom to help them get there.

The motivational meeting starts with spending some time together with my clients reviewing a rent-or-buy calculator to decide if buying is still the best option for them. These calculators are meant to evaluate a specific home, rather than if buying a (any) home is right for you, so when you do it, look at a few different types of housing options. That helps to reinforce the fact that usually buying is what they want to do. And if not, then it’s best to know now, using good estimates.

Next we revisit our mortgage options. It’s worth touching base with a few lenders at this point to see if they can beat our current deal. Maybe a 203k renovation loan, and a fixer-upper might work. Depending on the buyer’s timeline, an adjustable rate mortgage (ARM) usually offers a lower interest rate than a fixed mortgage, at the beginning. However, please make sure to talk to your agent and mortgage lender to ensure you’re not taking on any ill advised risk. Finally, we adjust our search criteria to what’s realistic in the new budget.

James McGrath – Yoreevo

In general, I think interest rates, while important to housing, get too much attention. Are higher interest rates bad when buying a home? Absolutely – there’s no debating that.

However most people do not buy homes based on financial reasons. Buyers are not opening the Wall Street Journal every morning and looking at interest rates. They buy when they have a life event – they get married, have a kid, get a new job, move to a new city, etc.

Also, most people incorrectly tie what the Fed is doing to where mortgage rates are going. The Fed’s interest rate (the fed funds rate) has no correlation with interest rates over the short to medium term. If the Fed raised rates yesterday, the mortgage rate available to you today is just as likely to be lower as it is higher.

I can walk through why that is but the takeaway for buyers is they should never be rushed into a transaction, especially one as large as purchasing a home, because someone on TV said rates are going up.

Tab Demita – Fifth Third Mortgage

Homebuyers should not be put off by rising interest rates. From a historical perspective, what we perceive as ‘high rates’ are still not truly high and current rates don’t preclude most people from home buying. For example, the average home cost in the United States is $180,800. If you assume a 5% down payment then the loan amount is $171,760. At a 4.5% interest rate the principal and interest payment would be $870.00. At a 5% interest rate the principal and interest payment would be $922.00. Most buyers can weather a payment increase of $52.00 without issue and wouldn’t let a small difference interfere with the purchase of a home they love.

Interest rates would need to be much higher (think 6%- 6.5%) to begin to preclude buyers from the homes they desire. Keep in mind the average rate in 2007 was 6.34% and in the year 2000 8.04%, so it’s important to keep in perspective what rising interest rates really means. While they are going up, they are still low and manageable for most. People who have ARM loans or older mortgages may still find it advantageous to refinance.

Cornelius Charles – Dream Home Property Solutions, LLC

The best advice for when interest rates are rising is to look at the monthly mortgage payment you can afford in addition to the loan amount that you are qualified for. With a higher interest rate, that means you will be paying more in interest every month than you would on the same priced home with a lower interest rate. For many, that means their actual affordability will decrease. So instead of just looking at the price of the home, buyers need to be mindful of what their actual monthly payment will be with the increased interest rate.

Lou Haverty – Financial Analyst Insider

I believe home buyers should make a purchase only when they are financially capable of meeting the mortgage payments and other expenses that go along with maintaining a house. Although interest rates are rising and it might seem less affordable on the surface, there are benefits of waiting rather than rushing to purchase a home. The biggest benefit is that rising interest rates help switch the environment to a buyers market rather than a sellers market.

This is because there are less buyers able to purchase the same property at the same price when interest rates go up. Since homes become less affordable, potential buyers have more negotiating power to split closing costs or request a lower price than the asking price.

I think most buyers that plan to stay in a property greater than 5 years are better off with a fixed rate mortgage. You always have the ability to do a refinancing if rates decline below your mortgage rate. Buyers that are looking for the lowest cost mortgage possible might consider a 5 yr arm mortgage. This will give them a fixed rate for the first 5 years at a slightly lower rate than fixed rate mortgages. The risk is that your rate may increase significantly after the first 5 years if your not able to refinance into a new loan or sell your property for a gain over the purchase price.

Summary

Well, there you have it. Advice from the experts on what to do during periods of rising interest rates. We hope you were able to read through these many various viewpoints and come to a conclusion about what is best for your personal situation.

At Team Sztanyo, we are a Cincinnati and Northern Kentucky real estate agents who are helping families find their way home. If you are looking to buy, sell or invest in the Cincinnati region, give us a call today.