After what seems like years of teasing us with the possibility of rising rates, the Federal Reserve finally made their move with a quarter-point jump last week. Economic conditions, led by a strong job market, triggered for the first rate rise since June 2006. The move is a sign of confidence in the economy (that’s a good thing!), albeit one that is feared to slow down economic growth (not so good!) and potentially scare off buyers who were just starting to feel OK about getting into the L.A. real estate market (bad, very bad!).
So what does that mean for homebuyers and owners? And what can you do to prepare yourself for rising rates? A lot, actually.
Accelerate your home search
Were you planning on waiting until spring to buy a new home in The Valley? You’ll have company. It’s not called the spring buying season for nothing.
But predictions that rates will continue to rise in quarter-point increments throughout the next year may make you want to change those plans. Buying a home in L.A. now at a lower rate can flat out save you money—consider that a rate that’s one point higher translates to about a 10 percent rise in your monthly payment. Not to mention the other advantages of buying a home in winter: namely, less competition and the possibility of getting a better price.
“If you’ve been on the fence about refinancing or buying a home, vacation home or rental property, now is the time to act,” said Huffington Post. Once interest rates start trending up, the borrowing costs for your real estate investment will rise.”
Huffington Post used a $200,000 loan example to illustrate the difference in payments between today’s rates and a rate that’s one point higher (“A difference of $115 per month doesn’t seem like a lot. But if you wait to borrow, in one year you’ll pay an additional $1,380. Multiply that $1,380 by the 30-year term, and the delay in snaring a mortgage costs you more than $40,000.”), but let’s extrapolate that:
- On a $400,000 loan, that’s $230 more per month, $2,760 more in one year, and more than $82,000 over 30 years.
- On a $600,00, loan, it’ll cost you $345 additional per month, $4,140 in one year, and more than $124,000 after 30 years.
Get locked in now
If you’re playing with the idea of buying a new home, get on the phone with your lender and lock in your interest rate.
That will protect your rate for a period of time—usually 30 days, but could be up to 60—so you won’t be impacted by further rate increases that take place while you’re in escrow.
The ability to lock in a lower interest rate than you currently have is the No. 1 reason to refinance before rates tick further upward.
“Examine the terms of your existing mortgage and calculate the damage if the rates rose two or three percent,” said Consumer Reports. “If you plan to stay in your home longer than three or four years and haven’t already refinanced into a 15- or 30-year fixed-rate mortgage, do it now.”
But there are a few other refi scenarios worth considering, according to mortgage resource HSH.com:
- You want to get rid of your adjustable rate.
- You want a shorter term—“If you’ve been paying down a $300,000, 30-year fixed-rate loan at 5 percent for 10 years, your balance is now $236,736. Refinancing that balance into a 15-year loan at 3.5 percent will raise your monthly payments by just $82 and shorten your loan term by five years,” they said.
- You want to wrap a first mortgage and a home equity line into one loan.
- You want to get rid of Private Mortgage Interest (PMI)—If you have at least 20 percent equity, you can qualify.
Pay back your home equity line of credit
Your home equity line of credit (HELOC) is perhaps most impacted by rate changes and could rise dramatically if rates continue upward—especially relevant if you consider that this first rise isn’t a standalone and could signal a pattern of rising rates. “You could be looking at a 50 to 100 percent increase in your payment,” warns Consumer Reports.
Reconsider any real estate investment trusts (REITs)
These real estate focused, high-yield mutual funds may not look so good with higher rates. It might be time to reevaluate your investments.
“There’s an inverse relationship between REIT prices and interest rates: When interest rates go up, the value of REIT funds tends to drop,” said Huffington Post.
Tripp Jones Real Estate for Santa Clarita and San Fernando Valleys, Call 661-733-4555 or 818-527-6292