Rising interest rates are having a direct impact on U.S. consumers' lives, from auto loans to credit card debt. And if you have an adjustable-rate mortgage or are seeking a home loan of any kind, the unprecedented frequency and degree of rate hikes is adding insult to injury.
That the housing market has radically changed in a year is an understatement. For those who considered making a move but didn't, you may be suffering a case of the "should haves." But if buying a home is a more recent consideration due to a promotion, family addition, downsizing or retirement, now may be the time to act.
David Hyde, BOK Financial MortgageSM Arizona manager, offers six insights for those seeking to buy a home now:
1. Take a team approach
Rather than relying on faceless online resources, draw on the expertise and experience available from a real estate agent, mortgage expert, an accountant and others, as needed.
"Have a good lender and team on your side to get open and honest advice," said Hyde. "The best outcomes result from good, advance conversations about your holistic needs like space, location and schools, for example."
2. Understand mortgage trends and rate differences
Hyde recommends considering adjustable-rate mortgages (ARMs) if you'll only be in the home for a few years, citing a savings advantage (perhaps 1% annually for a five-year ARM) over the payment certainty of a traditional 30-year, fixed-rate mortgage. Market statistics confirm ARMs' popularity in the current rate environment. They accounted for just 3% of mortgage applications in early 2022, but had risen to 11% by mid-May, their highest share since 2008, following nearly-double interest rate increases in those few months.
3. Research available mortgage alternatives
Assuming a 30-year, $400,000 mortgage (the current US average according to published figures), a 1% rate hike from 5% to 6% raises a monthly payment from $2,147 to $2,398 and the cumulative interest over the life of the mortgage from $373,000 to $463,000. Even with those increases, Hyde says that he and other professionals would willingly look at any offer and provide an unbiased opinion.
"You want to fully know what you're getting, buying or choosing so you have a complete breakdown," said Hyde.
Moreover, by consulting with a qualified lender, borrowers can learn of lesser-known alternatives, including nuanced programs available to physicians and Native Americans, among others. Lenders often know of affinity programs offered by home builders, too.
Another alternative is using a higher down payment to "buy down" the interest rate. Hyde cites his own daughter, who recently did just that in a quickly appreciating California neighborhood. By effectively "investing" cash that may have otherwise languished in a low-interest savings account, she immediately raised her equity and enjoyed a double benefit when the below-market mortgage rate reduced her monthly payment.
4. Take advantage of a leveled playing field
According to Hyde, buyers are now less at sellers' mercy, for several reasons:
- Fewer buyers are in the market, having been edged or pushed out by rising interest rates, which weakened demand in many communities. In fact, mortgage applications were down 21% in early June compared to a year ago—and are at a 22-year low. Further, new single-family home sales were down more than 17% in June 2022 compared to a year earlier, according to a July release from U.S. government sources.
- Sellers, who earlier were able to sell their homes with waived inspections amid strong demand when rates were cheaper, can no longer expect to do so. Relieved buyers are now better positioned to negotiate resolutions to wear-and-tear or structural issues, or purchase a home warranty.
- Home prices are now more in line with appraisals, and the frenzy that often came with crowded open houses, multiple competing offers and above-ask bids has generally subsided, Hyde said.
5. Calculate the full cost of buying and moving
While it's easy to fall in love with a new or updated home, the rapid escalation of home prices and the pandemic-era economy are having a domino effect on related costs:
- Higher valuations—20% being often cited for appreciation in 2021—can proportionately affect down payments.
- The probability of incurring Private Mortgage Insurance (PMI) increases with home prices for buyers paying less than 20% down. Estimates range from $30-$70 monthly per $100,000 borrowed.
- Depending on distance, moving can easily average $2,000-$5,000 or more, with costs impacted by higher and variable fuel and labor costs.
- For those who are buying and selling, the carrying cost of an unsold home can be stressful and burdensome.
"You really need to have a conversation with people who understand how life affects what you're doing and can talk you through the different ups and downs of what's happening in your market."- David Hyde, BOK Financial Mortgage regional manager
6. Consider home-buying assets in addition to income
Online payment calculators or rule-of-thumb income allocations for housing can ignore important factors when determining affordability. Besides current income, you may have dividend or trust account income contributions; higher future-year income from professions like medicine; or convertible stock options or passive income. For example, Hyde was able to repurpose accumulated college savings for his children into a larger, more suitable home when they attended a college nearby and live at home, avoiding lodging expenses.
It's still a good time to buy and financially smart to be a homeowner, Hyde said. Materials costs for new homes will likely continue to increase and ARMs offer near-term protection and flexibility in a rising mortgage rate climate. Inflated values are easing, and more inventory is coming onto selected markets. He warns against chasing a rate and forsaking the home that best suits your needs.
Mostly, Hyde says, buyers can make better decisions by using a full-team approach and taking advantage of the knowledge that lenders and others provide. "You need to get with strong professionals who understand the market. Our job as bankers and financial advisers is to make sure our clients get the best of what they can afford and works for their family."