Since the election of Donald Trump, the market for mortgage interest rates has risen sharply, causing many homebuyers to wonder what impact this will have on their dream of homeownership.
The purpose of this article is to help you, the homebuyer to understand how current market dynamics are impacting home financing and to propose strategies to mitigate the impact of rising interest rates.
To begin, it is important to understand what has led to the recent rise in interest rates. The election of Donald Trump has served as a catalyst for the rise in rates because the market is factoring that President-elect Trump’s proposals for lowering taxes and spending on infrastructure will increase economic growth, which will lead to inflation.
Aside from the election results, it is widely assumed that the Federal Reserve will raise the Fed funds rate at its December meeting. In fact, the CME Group publishes a Fed Watch Tool, which pegs the odds of an increase at greater than 90%. As a result, today’s interest rates already reflect the expected increase.
Whether or not Trump’s proposals play out or the Fed raises rates, interest rates have already seen the sharpest rise since 2013, which has increased your cost to borrow and decreased your buying power.
Strategies for Homebuyers
One way that you can mitigate higher interest rates is to consider alternative products to the traditional 30-year fixed rate mortgage. One such example is the Adjustable Rate Mortgage (ARM).
ARMs come with lower interest rates for an initial period of time compared to the 30-year mortgage. Thus, during this period, you will pay less in interest and more of your money will go to paying down principal.
The reason adjustable rate mortgages start with lower rates is that the lender does not have to factor in the risk that your loan will potentially be in existence for 30 years at the same interest rate. This is because after the initial period of time when the rate is fixed (typically ranging from 5 — 10 years), ARMs can adjust up or down depending on market rates at the time of the adjustment.
Because of the adjustable rate feature, lenders bear less risk that the loan they originate today will be below market rates in the future, so in exchange for that feature, you get a lower interest rate. To learn more about ARMs, click here.
Finding the Lowest Rate
If you’re not willing to finance your purchase with an adjustable rate loan it is critical that you secure the lowest available rate or face substantially higher monthly payments.
You may be wondering how is it possible to secure a lower interest rate on a 30-year fixed from one lender versus another? There is a misperception among homebuyers that rates are the same across all lenders, which is one of the reason that only 1 out of 4 homebuyers apply with more than one lender.
However, the reality is that there can be a substantial disparity between the rates offered by lenders depending on the the type of company, the technology they use and the way they pay their sales people. As rates rise, it is imperative that you shop to find the lender with the lowest rate or you may end up a spending tens of thousands of dollars in excess interest.
There is one certainty in mortgage lending and that is that there is no certainty when it comes to market interest rates. Recently we have experienced a sharp rise in rates, but they still remain close to their historical lows. So if you are informed and prepared to take specific actions, you can still achieve your dream of homeownership and do so with the best deal for your particular transaction.