Mortgage rates are rising.
While not totally unexpected, higher mortgage rates have caught today's home buyer off guard.
Rates fell all year, to the astonishment of Wall Street and the joy of Main Street. 3.5% rates were not only available but common.
Four-percent-plus rates are now the new normal.
Home buyers who could afford a $250,000 loan in early November can now qualify for just $238,000. In some markets, that's the difference between a single-family home and a condo, or two bedrooms instead of three.
Mercifully, rates have not risen higher than they are right now. 2017, though, could tell a different story.
The best rates could be the ones to which home buyers have access right now.Click to see today's rates (Jul 21st, 2017)
Higher rates came like a thief in the night.
Mortgage rates skyrocketed when the historic U.S. presidential results became evident in the early hours of November 9. Rates climbed at break-neck speed, and had their 17th worst week in history.
If you're not a home buyer -- or a refinancing homeowner -- you may not have noticed. Even casual rate shoppers couldn't miss it, though.
Mortgage rates jumped more than 50 basis points (0.50%) in days, diminishing buying power and making refinance shopping a moot point for many homeowners.
Home buyers are feeling it the most.
Here's a snapshot of what buyers could afford pre-election -- assuming 10% down and a 30-year fixed rate -- and what they can afford now.
|Payment||Home Price: October 2016||Home Price: December 2016|
When a buyer goes shopping for a home, their first step is obtaining a pre-approval letter from a lender. That pre-approval states the dollar amount for which the buyer qualifies.
The approved purchase price is based on the buyer's personal information, such as income, credit score, and level of savings. Another piece of the approval, though, is outside the borrower's control: the interest rate.
As rates rise, the applicant qualifies for less. Here's an example of how that can jeopardize the buyer's plans:
The buyer already made an offer at $250,000 -- and didn't lock the rate. Rates rise. The seller expects the same purchase price, but the buyer's qualified purchase price falls by $10,000.
The buyer must come up with the difference in cash, re-qualify at the higher mortgage rate, or find a less expensive home.
Rising rates can also force the buyer to reset expectations.
That can be heartbreaking.
For instance, you were looking at a three-bedroom home with a yard. Rates jumped, and now you qualify for yardless homes with fewer bedrooms or bathrooms.
Rising rates are no friend of eager home buyers. Thankfully, there are ways to combat rising rates.Click to see today's rates (Jul 21st, 2017)
Millions of home shoppers are now adjusting to higher mortgage rates.
Thirty-year rates in the mid-3s are gone; the new reality is here.
Fortunately, strategies exist to get the home you really want, despite higher costs.
Competition for homes has been rampant of late.
In some cases, a home goes on the market for $400,000 and sells hours later for $500,000.
Hot markets such as Seattle, Washington, Portland, Oregon, and San Jose, California see buyers warring over few available homes.
These types of bidding frenzies will become less commonplace as rates rise. Buyers will have less flexibility to "shoot the moon" in a bidding war. Their payments would be too high.
As the housing market cools off, you may be able to get your full-priced offer accepted rather than being outbid.
There may even be room to negotiate on price.
Rising rates could actually make 2017 home buying easier.
You can afford any home price if you make up the difference in cash.
For instance, if you qualified for a $250,000 home this summer, you can still buy that home. But you may need to come up with a bigger downpayment.
That may not be as hard as it sounds.
All major loan programs allow the buyer to receive a cash downpayment gift from an eligible family member, non-profit, employer, or even long-standing friend.
A downpayment gift will lower your mortgage amount and keep your monthly payment the same as you were planning. More important, you could still qualify for the home you originally wanted.Click to see today's rates (Jul 21st, 2017)
Mortgage rates are like anything else: you get what you pay for.
The more "discount points" you pay, the lower your rate. A discount point is a percentage of your loan amount paid upfront in cash that reduces your rate. Five-hundred dollars is equal to 0.5% discount points on a $100,000 loan.
Think of it as pre-paid interest.
Instead of paying a higher rate over time, you can pay cash upfront and lower your rate for the life of your loan.
Discount points come with risk: you might sell your home or refinance your loan before discount points pay for themselves.
But they could lower your rate enough to help you qualify for a higher mortgage amount.
One discount point could lower your rate by about 0.25%, depending on the lender, the current rate, and mortgage program. Ask your lender for a range of rate and discount point options to make the best decision.
If you no longer qualify for the loan you wanted, try another loan type.
Home buyers often choose a conventional loan -- a good choice -- but not as flexible as an FHA loan.
A conventional loan allows your home payment and all other debt payments to equal up to 43% of your gross income. FHA allows 45-50% in some cases. That means you could qualify for a higher home payment.
You also might get a lower rate with an FHA loan.
Home buyers with military service should look at VA home loans, which come with rates as much as 0.25% lower than those of conventional ones, according to mortgage software company Ellie Mae.
A home buyer that switches from a conventional loan to VA could almost completely compensate for recent rate hikes.
A USDA loan, too, can help your chances of qualifying. Its mortgage payment maximums are lenient, and, since it's a zero-down loan, could free up cash to buy down the rate.
Even if you've already qualified for a loan, re-check your status using all your mortgage program options. You may find a lower rate or more flexible guidelines with an alternate mortgage choice.
Mortgage rates are higher than they have been, but lower than they were historically, on average.
Over 45 years, the thirty-year fixed rate averaged 8.25%; rates are now half that.
Get a quote for your mortgage. No social security number is required to start, and all quotes can be locked in with a property address and accepted offer.Click to see today's rates (Jul 21st, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)