Buying A Home When Rates Go Up

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Buying A Home When Rates Go Up

By: Tom Levine

Many people fret the rising tide of interest rates. You'll hear things like, "Did I miss the boat? Is it too expensive now to buy a home? How can I afford the house of my dreams? Maybe I should wait! Maybe I should just rent for a while! Maybe the rates will go down in a few weeks. "

Stop! Nonsense, I say!

I bought my first home at close to 9%. Buyers from the 80's told me I was getting in at a bargain, and anyway, who cares? I don't. I refinanced long, long, long ago. 9% is just a part of history now.

So, here's 5 important points you need to keep in mind, when the ebb and flow of interest rates, ebbs up, more than it flows down...

  1. There's no better time, then NOW!
  2. Long Term Investing
  3. Creative Financing
  4. Uncreative Financing
  5. Buying a Home when Rates go Down

1.) There's no better time, then NOW!:

I know it sounds cliché, but it's true. There's no better time to buy, then now. Why?

  1. Because if rates are going up, then the law of supply and demand insists that the rising price of homes will likely slow down.
  2. Since appreciation slows down when rates go up, this is an opportunity to buy at a perceived discount
  3. Remember, rates fluctuate, and nothings forever. So, it's more important to get your darned foot in the door, right now. You can always refinance later, as rates ebb and flow back down. You'll still have the benefit of having gotten into the house, at a lower, discounted price, and you can then enjoy both a low rate when you refinance, alongside knowing that you got the house when prices slowed down, maximizing the gain when appreciation revs back up again.

See what I mean? Don't wait. It only gets more expensive. There's always, no better time, then NOW!

2.) Long Term Investing:

If this is your first home, then you have to think beyond the next year or so, and move your frame of reference into a longer futuristic point of view.

  1. Are you going to live in the same house, for at least 5 years?
  2. Most of us would answer yes, therefore, you need to be more concerned with real estate in the long term, let's say beyond 5 years, and you need to be less concerned with the short term rise and fall of rates. You'll drive yourself nuts otherwise.
  3. 5 years is a pretty solid range of time, for rates to go both up, and down. In other words, history proves that for the most part, you'll live through the ebb and flow of rising and falling rates, as a homeowner, and you know what? You'll survive; in fact, you'll thrive, because you'll enjoy a net gain in appreciation over the long term.

So rates go up and down in the short term, but in the long term, real estate always appreciates, and that means that homeowners always win.

3.) Creative Financing:

This is the good stuff. When rates go up, opportunities abound. You see, many homeowners, builders, and developers, find themselves in more negotiable positions because of the laws of supply and demand. Surplus rises, and buyers slow down.

  1. If financing is an issue, then you may be able to negotiate with the owner to carry the note, and completely bypass more conventional lending institutions.
  2. If affordability is an issue, then perhaps you'll find many more re-sales out there, perhaps fixer-uppers, ready to negotiate for a lower price (Can you say, built in equity?)
  3. If discounts and incentives are your game, then perhaps you'll locate some developers anxious to move inventory, with a flare for adding a rebate, or doing you're landscaping, or building that retaining wall you wanted.

The key here (and this is very important), is to find an excellent real estate agent. I can't stress enough, how important it is to have someone on your side, who understands the lay of the land. Don't go at it alone. Just go find someone knowledgeable, who you can trust, and who is ready and willing to roll up their sleeves, and go to work for you.

4.) Uncreative Financing:

As of the writing of this article, rates are still very, very low. Anything below 7%, for a fixed rate, in my opinion, is totally workable.

  1. Between 1979 and 1990, fixed interest rates ranged from 11% to 16% on average. This is highly unusual historically, of course, but it is an excellent benchmark, when you evaluate how good, or bad, things are right now.
  2. So as you're exploring your choices, don't lose sight of the big picture. Getting your foot in the door is more valuable, then being left out in the cold.
  3. One other important point. For all those homeowners that purchased in the 80s, do you think they're terribly concerned now about the ebb and flow of rates? Do you think they kept their 11% fixed rate loan, or do you think they refinanced when it dropped down to 6% (or paid the house off by now). I'd venture a guess, that virtually all of them; have a nice, hefty, bulky, attractive pot of equity sitting on their front porch step today.

5.) Buying a Home when Rates Go Down:

When rates go down, of course, it's obvious that getting a loan and buying a house is extremely attractive.

  1. But when rates go down, there is a lack of homes on inventory.
  2. Can you say, "Non-negotiable", or "bidding war", or "oops, sorry...Already sold!"
  3. When rates go down, the seller is in the driver's seat, and the buyer is running around with checkbook in hand, yelling "Where do I sign?"

Keep that in mind. Which would you prefer? Personally, I dislike high rates, but I LOVE being in the drivers' seat. I guess in the end, you've just got to work with whatever environment exists today. Any way you look at it, you can't stop and wait until the cards stack up in your favor. You just have to dive in, and get started. If you like to be creative, if you like opportunities, and if you like to be in the drivers seat then rising rates shouldn't bother you in the slightest. Renting is more of a crime to your finances, in the long run.

We've enjoyed providing this information to you, and we wish you the best of luck in your pursuits. Remember to always seek out good advice from those you trust, and never turn your back on your own common sense.

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About The Author

Tom Levine

Copyright 2005, by http://www.loans-directory.org/, This article is available in full format at: http://www.loans-directory.org/article-when-rates-go-up.htm , Tom Levine provides a solid, common sense approach to solving problems and answering questions relating to consumer loan products. His website seeks to provide free online resources for the consumer, including rate-watch, tips and articles, financial communication, news, and links to products and services.

info@loans-directory.org

Comments

dancingshlee4285 04.05.2009. 00:08

How long after buying a home can you refinance? My husband I just bought home in July 2008 for 87k. Our interest rate is at 6.25. With the mortgage rates falling because of the economy, we would like to refinance to pay off some bills and to get a lower rate. We are first time home buyers and have a fixed 30 year FHA loan. Do we have to wait one whole year to finance or can we do it now?

dancingshlee4285

Admin 04.05.2009. 00:08

Smart move. It depends on the fine print of your current loan. Does it have prepayment penalties or any other ugly clauses? I suggest you simply call your current lender and tell them you are thinking of doing and see what they say. They may even give you a break on document fees and closing costs to stay with them, although it may not matter with FHA.
I just built a new home, closed in Sept for 6.34% and refinanced with a different lender for 4.75% in April. Tip - you can fold the closing costs and doic fees into the new loan if you don't want to lay out the cash. Your monthly payment will still be much lower.

Admin

Arlene A 07.04.2008. 16:36

Why is no one going after the loan sharks who suckered all these people into? buying homes with variable rates?
gaston h-It's not Bush who started putting restrictions on the banks, it's the Democratic Congress who did that. Congress made the bankers stop profiling people when giving out housing loans. Congress told bankers to stop looking up people's work history and finance and education level in order to decide who gets a loan. If Democrats in Congress had not fooled with the system, the economy would not be in such big trouble right now.

Arlene A

Admin 07.04.2008. 16:36

They are. And there is a big difference between loan sharks and the lenders that LEGALLY lent money.

When are we going to start teaching people to be responsible, and stop looking for a way to get a free ride?

Admin

Millie 15.06.2009. 01:32

Would it be too hard to buy a home and plan for an overseas trip finacially wise? My husband and I are wanting to buy our first home while interest rates and prices are low but we are also planning an overseas trip at Christmas time. Would this be finacially stressful?

Millie

Admin 15.06.2009. 01:32

Only if you cannot afford both!

You didn't provide what you guys earn, credit scores etc

Admin

angelica 13.08.2011. 15:05

what is the different between buying a home vs rent to own a home? im doing research on the different from buying a house vs rent to own a home, so far rent to own a home seems like a better plan but im still not sure. i don't have good credit. someone told me i should just look into buying a home because the interest rate are low and i probably end with a higher interest rate if i rent to own, is this true?

angelica

Admin 13.08.2011. 15:05

The agreements that I am familiar with are a lease of the property with an option to purchase. This enables a purchaser, who currently does not qualify for a mortgage because they lack the sufficient funds for a down payment.

The property owner would lease the property for a monthly rent, plus an additional sum that would be credited to the purchaser when they executed their option to purchase the property, failing which, the purchaser would forfeit the additional sum that had been paid over the term of the lease.

The additional sum would perhaps be set at what an institutional lender would require as a down payment at the end of the lease term. i.e. $ 200.00 per month for 60 months on a 5 year lease would be equal to $ 12,000. for a down payment.

The seller nominally sets the purchase price at what he believes the property will be worth at the end of the lease term, which may be either high or low.

If the value of the property increases over the leasing period, and the market value is higher than the agreed purchase price, the lessee will then execute their option to purchase and congratulate themselves on having made a good deal.

If the value of the property decreases over the leasing period and the property value is now lower than the agreed price, the lessee may have second thoughts as to whether to execute their option or to walk away and forfeit the additional sum paid over the term of the lease.

Hypothetically speaking, all thing are negotiable and the property owner may be willing to renegotiate, but if s/he is determine to sell the property and the lessee is not willing or able to purchase the property, then they may be asked to vacate the property and the property owner is free to sell the property to someone else and has received the additional sum of $ 12,000 for his/her trouble.

IMPORTANT NOTICE: This information is provided as basic educational information by the author and is not a substitute for the advice of an expert and/or the advice of a Lawyer. There is NO representation as to legality, accuracy, correctness of the herein information and the reader is strongly urged to consult a lawyer in the relevant jurisdiction to ensure accuracy before acting on this information.

Admin

yeah 23.02.2010. 01:22

What all goes into buying a mobile home as far as costs? My friend and I are considering moving into a mobile home instead of an apartment next year. The initial cost of buying and owning the home will be $5000 and the lot rent will be $268 a month. Beyond paying that initial amount to own the home and our rent+utilities, what other costs might we run into in buying the home? Do mobile homes have mortgage rates if you own the home? I dont know much about this at all and I'm looking for as much help as I can get!

yeah

Admin 23.02.2010. 01:22

If you are buying the mobile home outright with cash, then naturally, you won't have a loan payment. If you are needing financing, then a mobile home that is not permanently attached to the land is not considered real property, and as such a mortgage loan would not apply. This would be considered a consumer secured loan, and, as such, the interest rates would be higher.

Admin

cannonball 14.10.2006. 20:39

I hope the housing market crashes super bad so I can finally afford to buy a home. How about you? Holy crap. Things got WAY out of control here in Florida. Wages stayed flat for years while the housing market skyrocketed here. The only folks buying homes (and there were alot) were folks that brought alot of money from up north after they sold their home in New York or wherever or speculators would invest heavily hoping to make a quick buck. Actually, I hope the people that the speculators that drove the price up really suffer financially. According to major newspapers here in Florida, this may even trigger a recession.
What I am really getting at here is that I hope for a market correction.

cannonball

Admin 14.10.2006. 20:39

The pendulum is definitely swinging. We went through this back in the late 70's and early 80's. But this new generation has not learn from past mistakes. I read some misguided soul quoting the breakingbubble.com a few times. They blame the Realtors, Washington and everybody else under the sun except their own ignorance and stupidity. They deserve every thing coming to them. let me share with you why.

A home is not an investment instrument and definitely not a speculative instrument. Years back, we pay 10% interest rate on our mortgages. However, when interest rates fell to record low of 3%, 4% 5%, one can afford twice the home for the same payment. So everyone traded up. Why not and nothing wrong with it. Hpwever, what went wrong was because everyone got greedy are started buying homes or even "investment" houses to flip and things went on a rampage. None of these people have any kind of investment training or experience. Worse, they drove prices higher and a lot faster than earnings. Over night, all these how to get rich quick real estate courses sprung up. When interest rates goes up, payments just got higher and real estate prices come down. This is the law of real estate. The result is quite predictable. There will be a correction. I am hoping for a soft landing instead of a crash. Just stay put and don't get into the "me too" kind of a deal right now.

Admin

m_mladenov.geo 17.07.2006. 17:08

Can somebody tell me what are the best areas to buy a home in Austin, TX? I am interested to know what are the best areas to buy home in Austin, TX. What I am looking for is good commuting to the University and to downtown, low crime rate, near shopping centers and entertainment.

m_mladenov.geo

Admin 17.07.2006. 17:08

my buddy lives there and its northern austin--but keep in mind its a $hithole down there.

Admin

Emmu 11.01.2006. 20:40

How wise would it be to try to buy a home when I possess bad credit? My fiance and I want to buy a home but our credit is not good. His is better (in the high 600) and mine is in the low 600. Would it be better to wait until our credit improves to buy a home(this might take years) or to try and buy a home now and face higher rates?

Emmu

Admin 11.01.2006. 20:40

Your credit score isn't all that bad considering the national averages.

However, you have some other options besides outright purchasing a home for sale:

1. Lease Option or Rent-to-Own: Look for these advertised in the classifieds, that allow you to rent a house for a certain term (like 1 to 3 years), where some or all of your rent goes toward the purchase price. Then, when you're ready (you should repair your credit during this time), you can purchase the house. Part of your down payment will already have been paid.

2. Talk to the Fair Housing Administration (FHA - http://www.fha.gov) about HUD loans for low-income and not-so-good-credit individuals.

3. Look into purchasing a foreclosed home at an auction.

4. Ask a close friend or family member with good credit to co-sign your mortgage.

5. See if anyone is advertising "seller financing" or "owner financing", in which the seller will allow you to make mortgage payments directly to them.

-----------------
Update: DO NOT apply for an interest-only loan. You will be severely hit with a balloon payment down the line, or higher payments, or at the very least you'll have to refinance and pay additional closing costs. Interest rates are rising, and you won't want to do that. Stay away from these!

Admin

Tj 28.01.2009. 19:04

Are responsible home owners that pay the mortgage on time being punished? I find it sad that people are losing their homes, but at the same time find it a little ridiculous. Home owners who pay their mortgages on time are stuck with that interest rate/payment. Where as irresponsible consumers who got in over their head get relief. Does this mean good people, that bought homes and are paying on time get screwed? While those who got in over their head get a program to help them pay cheaper mortages?
In response toe AE Neyman: I know there is not relief program yet, but it is in talks. I am trying to grasping the impact this will have on those who paid there mortgages on time, did there homework, and bought a house they could afford (giving up the bigger nicer house that those who may get relief may now keep).

Tj

Admin 28.01.2009. 19:04

This is the norm. You bought a house that you could afford. Yeah, that other house you wanted, in the super nice neighborhood was great. You did not think you could afford it so you did not buy it. Your rate is good because you shopped around, 30 year fixed was good so you did not get screwed with an arm. You did your homework. You worked hard on your fico score and pay your bills early or on time.
It must be nice for that other guy who did buy in the super nice neighborhood, that big house with all those bedrooms. He put 0 down and got a 3/1 ARM, Interest only. His payment is about to go up 1000 a month and he needs some help. Maybe the government should reduce his principal so he can make his payments. His principal will now be equal to yours.
Great system, right. It just keeps getting better and better. It's funny cause the government is as screwed as everyone else. They made this happen on purpose. Try to grasp what a Trillion dollars is? I know, it's a bunch of toilet paper.

Admin

CK 16.04.2008. 21:44

What do you think of buying home this year? When is the best? When is the best time to buy home knowing the economic is not doing well and home price is going down?
Would you buy now? Would you wait till mid 2008, end of 2008? or wait until next year?

CK

Admin 16.04.2008. 21:44

The conditions are really favoring buyers right now. There is a ton of inventory on the market, interest rates are still favorable and many sellers are looking at offers in a whole new light.

These conditions cannot go on for too much longer, there is bound to be an upturn or increasing interest rates that are going to sour the great buyer's conditions that exist now.

Admin

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