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Dealing with Interest Rate Hikes

NOTE: This is archived information but will become relevant again some time in the future!

June 10, 2000 Few things will put a home buyer into a state of unrest faster than when interest rates jump, as we have seen in the last few months. "Our payments will soar!" they lament. "NOW what are we going to do?" you can hear them ask.

First,
don't panic. Yes, of course an interest rate increase will mean that the mortgage payment on a given loan amount will be higher. It may, in fact, throw your qualifying ratios off, meaning you will no longer be able to qualify for a certain loan amount. You may not be able to buy quite as much home as you could have a few months ago. It may mean that you will have to tighten the belt a notch or two more.

If you look closely, though, you may well be able to see the distinct edges of silver in that dark cloud. Consider:

  • With 30 year rates in the 8% range, the mortgage interest rate level is still less than the 9% average of the last 10 years, and considerably below the 15% and 16% rates of the early 1980's. Millions of home buyers were able to secure mortgages during those periods, and, as rates subsided, refinanced their homes. Whatever the rate is, you are not locked-in to it forever.
  • If a 1/4% rate hike throws you out of qualification, you may well have been looking at too much house in the first place. A small retreat in price won't be the end of the world. It's much better to buy a bit less house than originally planned than to not buy a house at all, especially if you are currently renting.
  • Even if you don't panic, thousands of other home buyers will, and will pull themselves out of the market. Less buyers = less demand. Less demand = more supply. More supply = more competitive pricing. This spring and summer has seen a strong seller's market in many areas. In some cities, it was how much over the listing price a buyer was willing to pay that determined who got some properties. The rise in mortgage rates may turn the tide a bit toward a buyer's market. Consider the following example. A house that would have sold for perhaps $112,000 when the rates were lower (and the buyers much more plentiful) may now, with a "cooler" market and less buyers, sell for $109,000. The effect on the selling price and interest rate might look like this:

 

THEN

NOW

Selling Price

$112,000

$109,000

Downpayment (10%)

$11,200

$10,900

Mortgage Amount

$100,800

$98.100

Interest Rate

7.75%

8.00%

Principal and Interest Payment

$722.14

$719.82

If conditions are right (as they often are when rates take a jump) it may actually be possible to have a lower monthly payment with a slightly higher rate! Of course, this is an example only. There is no guarantee that concessions will be available on a specific house or that interest rates will be as in the example. Historically, though, as interest rates have increased the number of available buyers have decreased and prices have been affected--to the buyer's benefit. Consider also, that the less you finance on a house, the more equity you will have when the market begins to rise again.

So what do you do? Take a deep breath. Relax. If you have been sitting on the fence waiting and are serious about buying a home, be more aggressive. Maintain your focus and keep your cool! This is the perfect time to get competing offers from different lenders. Give
Quicken Loans a try--they will get you up to 4 bona-fide loan offers. Review your needs and priorities. Hug your wife or husband or kid or best friend and don't let it ruin your day--let alone your life!

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