Everybody is trying to guess what rising interest rates will mean
for the housing market, but not enough people are focusing on what they
can do about it before it happens.
Yes, we’ve been warned before that a rate hike is coming, and it
still has not happened. But this time it feels like a reasonable
certainty that we’ve seen the lowest mortgage rates in this cycle – and
it was record cheap money.
No matter the timing of any serious rate increases in the future,
today’s mortgage rates are what anybody before this century would have
called an absolute steal. Fixed 30-year mortgages run in the 4 percent
ballpark today. That’s up about a half-point from 2012’s absolute lows,
but it’s still a bargain vs. the average rate of 5.5 percent since 2000
and the 10 percent average seen in the last 30 years of the 20th
century.
And the opportunity is not simply in low rates.
I’m not sure many people know that lenders are far more generous
today with both loan terms and approval standards than they were
immediately following the Great Recession that wrecked their mortgage
portfolios.
There are good reasons behind bankers’ renewed optimism: Home values
have firmed, as have the paychecks that allow homeowners to pay back
their loans.
Certainly, many households are satisfied with their housing and
mortgage situations. But let me suggest some ideas to consider as 2015
winds down, because I have a hunch that years from now many folks will
look back to today and say, “Gosh, I wish I could have borrowed more at
those great rates.”
SIMPLE REFI
Have you checked rates lately? Do you even remember what rate you’ve got?
Forget all the hassles of borrowing a few years back, right after the
recession ended. Lenders today have almost made the experience
pleasant. I said
almost!
And there are deals. Despite all the talk about rising interest
rates, mortgage rates have quietly slipped back to around 4 percent as
questions emerge about the economy’s durability and the Federal Reserve
delays hiking rates.
Perhaps home values are up significantly in your neighborhood. Maybe
there’s been a major improvement in your employment picture, paycheck or
credit score. Be aware that the mortgage rate you could get these days
might surprise you.
And if you think you’re living in a home where you will be for a long
time, is this the time to pay extra points or loan fees to get an even
cheaper rate with a refi and save even more money?
GO FIXED
Adjustable-rate mortgages became the scourge of the real estate
business after the housing debacle, because too many aggressive
borrowers, with the help of too many aggressive lenders, used these
deals to buy or keep housing they couldn’t afford.
The resulting pushback from bankers and borrowers alike reduced the
popularity of adjustable loans. Variable-rate deals funded 1 in 9 of all
Orange County home purchases in the past seven years, after being used
by half of all homebuyers in the previous seven years, according to
CoreLogic statistics.
I suggest that homeowners with adjustable rate mortgages consider switching to a fixed rate.
Yes, the most popular adjustable rate mortgages do offer extended
periods of locked-in starter rates, from five to 10 years. That’s plenty
of delay before any future payment shock.
But why risk it ? It’s a good bet that today’s low interest rates on
fixed rate loans are not much higher than what many borrowers are paying
on their adjustable loans now.
So wouldn’t you feel foolish some years down the road if you hadn’t
locked in today’s rates if your adjustable repriced higher? That’s one
reason I refinanced this year.
EXTEND LOAN LENGTH
Many homeowners used the cheap money environment to pick up mortgages
of shorter duration than the traditional 30 years to get even lower
interest rates.
There’s only one problem with these shorter-maturity deals: Monthly
payments are high, and much of the money is used to pay down principal,
so tax deductions for mortgage expenses are reduced.
It’s not a small amount. The monthly payment on a 3 percent, $400,000
15-year mortgage is $2,762. That same-size loan, at today’s 4 percent
rate for 30 years, costs $1,910 a month. That’s an immediate $852
advantage to going long.
Yes, a longer-term mortgage does have higher long-run interest cost.
However, think how that improved household cash flow can be used in
various ways to pay down other debts, invest in other goals – education
or retirement – or keep a financial cushion for emergency purposes.
(Yes, there will be another downturn.)
P.S.: If you’ll simply blow the fresh savings on luxury or frivolous goods, skip this idea.
BUY
First-time shopper? Moving up? Downsizing?
If you believe today’s mortgage rates are the last shot at a
once-in-a-generation deal, it may be time to think about making that
purchase.
Guessing which direction home prices will go is never a feasible way
to time a home purchase. For every person who swears they saw the
previous housing bust coming, how many saw the bottom and buying
opportunity of 2012, too?
I know some homebuying holdouts are convinced that home prices are
too high and will only go lower. I won’t debate the outlook, I’ll just
ask: How long do you think it would take for serious discounts to
appear?
Cheap interest rates could be history by the time any significant
price drop materializes. That could mean a higher monthly payment,
despite getting a deal on the selling price.
Ponder this: If mortgage rates jump a full percentage point in the
next year, home prices will have to fall by at least 10 percent to
offset the impact on monthly house payments.
CASH OUT
I know a lot of homeowners and financial consultants think taking equity out of the home is generally a bad idea.
Let me argue otherwise.
Assuming that you’re the type of financially savvy homeowner who
won’t spend every last penny in your bank account, here is a sad truth
about personal finances: No banker will lend when you really need money
(say, if you’re out of work).
Today, assuming you’re gainfully employed with a solid credit history, lender generosity includes doing cash-out deals again.
I’ll assume you’d use the proceeds of a cash-out loan for a noble
cause: paying off other debts, investing in other long-term needs or
creating a hefty rainy day fund.
And for those approaching retirement with plenty of home equity,
please just ask yourself where emergency funds will come from when the
paychecks stop. Sadly, it’s easier to access home equity when employed,
than not – unless you sell your home.
LINES OF CREDIT
If you just want the mental comfort of using your home as a financial
backstop in a tough situation, getting a home equity line of credit
today is an option.
Many lenders are offering these loans at little or no cost, with only
a modest annual maintenance fee. You won’t incur any sizable extra
house payments unless you access the line.
One downside is that these loans have a shorter lifespan than
traditional mortgages – often just 10 years to use it and another 10 to
pay it back.
And if you obtained a credit line a few years ago, it may be worth
looking into getting a new one. Terms have improved. Or you can simply
extend the life of your existing credit line.
INVEST
Let’s say you’re really bullish on real estate: Today’s cheap money can make a property investment pencil out profitably.
With a few significant caveats:
One, bankers still are cautious about loans for nonowner-occupied
housing. So be prepared to bring a significant down payment to the deal
and solid household financials – and be ready to answer plenty of
questions.
Two, cheap money helped push up home values. That makes many
investment deals not as profitable as hoped. Be realistic about any
investment potential.
Three, be prepared for bidding battles. Numerous investors are making all-cash bids for investment-type properties.
Nobody said this would be easy.
