With mortgage rates rising again, somewhat unexpectedly, a thought crossed my mind if you are currently home shopping.
Two years ago, I brought up the idea of adjusting the maximum purchase price to a lower level when searching for a property.
This post was prompted by several home sales that were exceeding demand at the time. In other words, a home may have been listed for $600,000, but ultimately sold for $700,000 in a bidding war.
This was all due to an extremely hot housing market, which was largely driven by a combination of record-low mortgage rates and extremely low supply for sale.
Today, we still have relatively low inventory, but cheap mortgage rates have come and gone.
Now that it’s so volatile, you may want to enter a higher rate into your mortgage calculator to ensure you don’t get caught.
Mortgage rates are very volatile right now
Right now, mortgage rates are unpredictable. While they enjoyed a very good 11 months, falling from 8% to nearly 6% in early September, they have since reversed course.
The 30-year constant was back in the high 5% range before the Fed cut interest rates and a better-than-expected jobs report arrived.
With some doubts about the Fed’s pivot and upcoming uncertainty about the election results, homebuyers now face a roughly 1% higher rate.
per Multinational DivisionThe 30-year fixed yield has risen from a low of 6.11% on September 17 to 6.92% as of October 23.
Talk about a tough month for mortgage rates, especially since many expected the Fed’s rate-cutting campaign to be accompanied by lower mortgage interest rates.
It’s a good reminder that the Fed doesn’t control mortgage rates, and that mortgage rates are best tracked by the 10-year bond yield.
Also, these returns are driven by economic data, not what the Fed is doing. By the way, the Fed is taking steps based on economic data as well. So follow the economic data for crying out loud!
However, this recent spike is a great reminder that mortgage rates don’t move in a straight line. And to expect the unexpected.
Use caution by entering a higher mortgage rate
If you are currently looking to purchase a home, it is generally a good idea to get pre-qualified or pre-approved.
This way you’ll know if you actually qualify for a mortgage, and at what rate, including the necessary down payment.
The problem is that these calculations are only as good as the quality of the inputs. So, if your loan officer or mortgage broker provides numbers that are too positive, it could distort your affordability picture.
In other words, you would almost want to ask them to put down a mortgage rate that is 1% higher than today’s market rates.
This way you can accommodate a higher payment if prices worsen during your property search, which can take months and months to complete.
If there is a price drop during that period, great, that will be just the icing on the cake. Your expected monthly PITI will be better than expected.
But just like the bidding wars that erupt, which send asking prices soaring, we should also expect unexpected rises in interest rates.
If so, you might look at properties that are within your price range, as opposed to homes that only work if everything is perfect.
Considering that homeowners insurance and property taxes are also on the rise (along with almost every other cost), it can pay off to be wise with your proposed homebuying budget.
Set your mortgage rate on the property listing page
If you use a site like Redfin to browse listings, there’s a handy mortgage payment calculator on each listing page.
It provides default amounts based on typical down payments, mortgage rates, property taxes, and homeowner’s insurance.
Let’s assume the interest rate is 6.77% today, which is very reasonable given current market rates.
If you click on the little pencil icon, you can change it to anything you want. You can also select a different loan type while you’re at it.
Once you do this, it tends to save your inputs, so when you look at other properties, the price you set earlier should apply to the other homes.
This can give you a quicker and perhaps more realistic estimate of your monthly payment, rather than a rate that may turn out to be too good to be true.
So you could put 7.75%, or maybe 7.50%. That way, if interest rates rise, or you qualify for a higher interest rate thanks to some rate adjustments at the loan level, you won’t be surprised.
You are essentially playing more conservatively in case prices worsen, which is the wise approach.
While you’re doing this, you may want to review other entries to make sure they reflect the proposed loan.
Are you really going to put 20% down on the home purchase, or just 3% to 5%?
Overestimating rather than underestimating these costs can help you avoid poverty at home. Or worse, losing your dream home entirely due to inaccurate estimates.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
Source link
