Options To Consider In A Rising Interest Rate Market
If you have been attuned to recent financial news, you may have noticed that interest rates are on the rise. In the mortgage industry, although we have seen numerous rate swings in the past decade, what’s different about this recent rise is a growing concern that borrowing costs are more likely to continue going up.
Since the financial collapse 10 years ago, the Federal Reserve has supported very loose monetary policy which artificially kept interest rates low. But recent positive economic news has triggered Fed concerns about inflation, and as such they are projecting a steady rise in their target federal funds rate. Although the Fed doesn’t set mortgage rates, its decisions have an indirect influence on them. Mortgage rates are now at a two-year high and have been increasing for the past eight consecutive weeks.
Higher mortgage rates not only impact a prospective homebuyer’s ability to qualify, but it presents an additional challenge to affordability in a real estate market where the prices continue to climb. During these times, it is more important than ever for borrowers to understand their financing options.
Since interest rates have hovered around 4% or lower for much of the past decade, fixed-rate mortgage programs have dominated the market. But as the 30-year fixed rate continues to increase, it may provide reason for some borrowers to consider an adjustable rate mortgage (ARM).
With an ARM, the initial interest rate is only fixed for a set amount of time, usually between 1 – 10 years depending on the program. After that, the initial interest rate could change and it is that uncertainty which makes an ARM a riskier proposition than a fixed-rate mortgage. But ARM’s might make sense for borrowers who anticipate moving before the initial rate period expires. For example, many first-time buyers in Hawaii may not expect to live in their first property for more than 10 years before they trade up to another. If they can save .50% in rate on a 10/1 ARM instead of a traditional 30 year fixed, it may be an advantageous option to consider.
Another mortgage option that exists with some lenders involves a temporary interest rate buydown. A temporary buydown offers borrowers lower initial payments and the stability of predictable payment increases. Temporary buydown plans are a good fit for borrowers who have the capacity for higher earnings within the first few years of obtaining a mortgage. Borrowers can benefit from temporary subsidies of the monthly payment of principal and interest. In a purchase transaction, these subsidies can be paid upfront by the buyer, seller or the lender.
For prospective borrowers, be sure to investigate your lender’s options to lock in your interest rate. Interest rate locks provide an option to secure the rate and remove the risk associated with future rate fluctuations. In addition, some lenders offer rate locks with a “float down” option, which not only protects borrowers from increasing rates, but also offers a benefit should the rates go down.
Although the recent trends in increasing rates have caused some concern among prospective buyers and current homeowners, it is also important to keep facts in perspective. Current rates are still very low historically when compared with other decades such as the 1980’s, when the mortgage rate was about 18 percent. But for the sake of your financial wellbeing, it is advisable to be proactive and seek the counsel of a reputable mortgage professional. Compass Home Loans offers fixed-rate, adjustable-rate, temporary buydowns, and other loan options to help you. For more information, contact us at (808) 518-3650 or www.compasshawaii.com.