People grew comfortable with 2% and 3% mortgage rates. With those rate options no longer being available, some homebuyers have decided to hold off on purchasing real estate in hopes that rates drop back down to historic lows. Some speculate that there will be another housing crisis, which may be an opportunity to purchase real estate at lower than market values.
Today's housing market is nothing like the 2008 housing crisis. That in and of itself is not why we won't have another housing crisis, but there are reasons why real estate and mortgage industry professionals are confident that a housing crisis is nowhere on the horizon.
Prior to 2008, mortgage lenders across the nation offered home loans that may not have been the best option for homebuyers. Some of these home loan options offered low interest rates, which made higher cost homes appear to be affordable. However, many home loans offered were accompanied with temporary rates (Adjustable-Rate Mortgages). Many lenders didn't verify the customer's ability to make the monthly payment required, which resulted in a significant number of foreclosures and forced homes to sell at prices below market value.
Since 2008, federal regulators have implemented numerous mandates for lenders to follow to ensure that home loans were only given to homebuyers who truly qualified based on verified income, credit, and assets.
Why the Lowest Interest Rate May Not Actually Save You Money
Since mortgage rates have recently reached a 20-year high, Americans have realized the impact that higher interest rates can have on buying power. When the interest rate is higher, the monthly payment will be higher. Most would assume that when this is the case, that they would be better off to wait or pay for a lower interest rate.
In my previous article, we discussed that the demand for real estate continues to increase while housing inventory (supply) is decreasing. When demand increases and supply decreases, the price will increase as well. Waiting for a housing market to shift in a way that results in home prices to decline may take an eternity. Industry professionals don't anticipate American real estate prices to go down anytime soon.
Another option would be to stop waiting and purchase a home now, but pay additional fees to get a lower interest rate. While this may be an option, I haven't recently recommended to my clients to spend any significant amount of cash to get a lower interest rate today because we anticipate that interest rates will continue going back down.
For example, let's assume that you purchase a home this month and spend $5,000 in discount fees to lower your interest rate. Let's also assume that in 12 months, the interest rates are lower than the rate that you spent $5,000 to get today. Instead, let's assume that you pay $400 in discount fees to lower your interest rate today and in 12 months, the interest rates are a point lower. In this scenario, you may have the option to refinance to a lower rate and spend significantly less than $5,000 AND have a lower rate altogether.
If you're unsure about where interest rates will be in 12 months, you're in good company. However, here's a great way to monitor the market and determine if mortgage rates are going to go up over the near to mid-term or if mortgage rates are going to go down.
Source: Google Finance 10 Yr. US Treasury Yield
General rule that I recommend is if you're thinking about spending any significant amount of money to get a lower rate, do it when rates appear to be trending upward. Spending a significant amount of money to get a lower rate when rates are trending downward may not be the best use of your cash.
Questions? Visit TheHomeLoanHub.com for more information or contact me personally at troberts@bell.bank
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. he has helped more than 10,000 clients start the homebuying process across America.
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