It’s hard to imagine that just a few years ago, mortgage rates were at record lows, falling below 3%. Yet by the end of last year, rates for the benchmark 30-year fixed loan had shot up over 7%, a record 20-year high.
Understandably, homebuyers have been suffering from a severe case of whiplash. Can they stomach these higher rates and still afford a house? Many aren’t sure.
“It’s different from any market that I’ve been through before,” says Ralph DiBugnara, a mortgage banker, real estate investor, and president of Home Qualified in New York City. “People just don’t know what to do, so a lot of people just aren’t doing anything. They’re not selling, they’re not buying. They’re just kind of waiting to see what’s happening.
In today’s unprecedented, unpredictable housing reality, it’s safe to say many of those traditional mortgage protocols we’ve all heard and faithfully adhered to in the past might no longer apply. Here are a few entrenched and widely accepted rules that are actually smart to break today in many instances—as well as some smarter moves to consider.
1. You should get only a 30-year fixed-rate mortgage
Given interest rates are so high on fixed-rate loans, homebuyers might want to consider the alternative: an adjustable-rate mortgage, or ARM.
ARMs tend to have lower interest rates than fixed-rate loans, at least during the earlier years of the loan. But true to their name, after a certain time period, that rate will adjust based on market conditions—and since no one knows which way those rates will go, it’s certainly a risk.
“Especially in today’s high-interest rate environment, an adjustable mortgage can offer you a great opportunity to obtain a lower rate,” says Bill Samuel, a real estate developer in the Chicago area. “The key is that you need to determine how much your payment will be if rates continue to increase and hit the capped level. If you are able to comfortably afford the potential maximum payment, then you’ll be better off with an adjustable-interest rate mortgage, generally speaking.”
“Adjustable-rate mortgages in general are a good strategy,” DiBugnara says. “But you have to have an exit strategy.”
An exit strategy could be a plan to refinance to a fixed-term mortgage when rates get lower, to sell the house, or to convert the property into an investment where you make income and can handle the higher interest rate in the future.
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