7 On Your Side: Best money moves to deal with mortgage rate hike
This week, 30-year fixed mortgage rates rose more than a half-point to 5.78% the biggest increase in 28 years.
So what does this mean if you are selling or buying a home?
"We fell in love with the location, we fell in love with the house," Mohamad Hussein said. "We got it, we felt lucky."
Breathing a sigh of relief, the first-time homebuyer closed on his Cliffside Park property last March.
Hussein said if he applied today, his 2.5% interest rate on a 30-year fixed mortgage would be 6.5%.
His family would not have been able to afford to buy their dream home now.
For example, take a $500,000 dollar mortgage.
A four-point interest rate increase on a 30-year fixed mortgage would cost a homeowner $1,185 extra per month in interest.
That's $14,220 per year, and a whopping $426,600 extra in interest during the life of the loan.
"Our first-time home buyers are going to be taken right out of the market," Robert White said.
White, President of New Jersey Realtors said buyers with slim margins on what they saved to put down and can afford to pay monthly will choose to keep renting and wait it out as mortgage rates are expected to continue to go up.
"You might see somewhere between 7.5 and 8%, but that's combatting inflation then rates will drop back down," White said.
His advice for prospective home buyers is lock in a lower rate now and then refinance.
"They may be paying a higher rate now, but they will be able to refinance those loans at a later date at a lower interest rate," White said.
White said don't listen to advice like buying down your rate with points, which doesn't pay off in the long run, or using a shorter loan term.
"That's gonna cost the buyer 60% more on the monthly payment," White said.
He also advises steering clear of ARMs, adjustable-rate mortgages, with enticing low introductory rates.
"Here's what could happen, you lock yourself into a 3-5-year ARM and let's say the rates have increased. Well now you can't refi because you're already locked into that rate and it's going to go up at the expiration of that ARM," White said.
What buyers can do in this market is try to put down a larger down payment. It will present you as a stronger buyer and help with the amount of equity you put into the home.
"You're not going to see any significant rate on interest unless you put down point 4% or more," White said.
Another tip is to downsize your wish list.
Consider a condo or townhome instead of the house for now or broaden your search to areas further out and use a direct lender, a reputable bank with guaranteed rates.
"The product they're promoting is sure to stay the same from start to finish," White said.
And lastly, lenders want your business, so make them compete. Shop around and consider working with a licensed mortgage broker they can help you navigate some uncertain times.
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