Real Estate NewsHigher Rates Sound The Call To ARMS, Locks
If you"ve been sitting on the fence for the past year hoping home prices would flatten, the run up in mortgage rates has just bitten you where you"ve been sitting.
A year ago, fixed mortgage rates hovered around 7 percent. Now they are nearer an 8.5 percent two-year high, according to Freddie Mac. A $200,000 mortgage will now cost you approximately $200 a month more in principle and interest than it did just a year ago.
Get off the fence, or expect more pain -- at shorter intervals.
Until recently, rates had been rising almost imperceptibly, actually dropping occasionally since late 1998 when they hit a 30-year low of about 6.5 percent. The snail"s pace may have caught some consumers unaware of the decidedly upward trend.
Earlier this week, the Federal Reserve sent a wake up call when it raised short-term interest rates by a half percentage point. Not since 1995 has the fed raised rates more than a quarter point.
With the rate for overnight loans between banks at 6.5 percent, the highest level since January 1991, the Fed also raised the discount rate -- the rate at which the Fed"s 12 district banks lend directly to financial institutions -- to 6 percent, the highest level since August 1991.
That means higher consumer loan rates -- including mortgages -- soon.
The increases marked the sixth time in the past 11 months that the Fed has raised rates to chill inflation. Most analysts had anticipated the half-point hike and mortgage lenders raised rates ahead of the Fed"s move, but don"t expect lenders to stop at 8.5 percent.
National Association of Home Builders chief economist David Seiders, among others, expects the prime rate to hit double digits before year"s end.
Indeed, the Fed has hinted at more belt tightening if the nation"s record economic expansion continues unabated.
"The true results of any hike may not become apparent for a week or so, as investors try to develop an appropriate strategy, specifically targeted on what will happen when the Fed next meets on June 27 or 28," said Warren Myer, CEO of San Jose, CA-based Myers Internet Services, Inc., a mortgage Web site consultant.
ARMS, Locks
Consumers best defense in a rising rate market includes adjustable rate mortgages (ARMS) and rate locks to temporarily freeze rates in time.
Freddie Mac reported 1-year ARMs still below the 7 percent threshold last week. That would give you a year"s worth of mortgage payments at last year"s fixed rate.
Whether you choose an ARM or a fixed rate, lock it up.
A traditional rate lock is a lender"s guarantee that you"ll get a certain interest rate, number of points, and other cost-related features.
The lock is good for a specific period -- if you fail to complete your home purchase or refinance before the clock runs out, and interest rates rise, be prepared to pay the higher rate or buy a new lock.
Monthly Principle, Interest On A $200,000 Home Loan
Rate P/I
Date*
6.5 $1,264.14 10/98
7.0 $1,330.00 05/99
7.5 $1,398.43 07/99
8.0 $1,467.53 12/99
8.5 $1,537.83 03/95
9.0 $1,609.25 01/95
10.0 $1,755.15 11/90
Source: Freddie Mac
* Previous date rates were at this level
8.5 percent is nearest current level of rates
6.5 pecent was the lowest level in 30 years
Here are some rate lock pointers.
Whatever lock you choose, get it in guarantee in writing. Oral agreements are difficult to prove.
Unless your contract says otherwise, a rate lock could prevent you from taking advantage of lower rates, but it"s not likely they will drop.
Lock in as many of the costs you can, the rate as well as points.
If you see a rate you want, set the lock ""on application"" rather than ""on approval."" On approval means you won"t have a stab at rates until the loan application is approved. In this market, that would almost guarantee you a higher rate.
Shop around for both the terms of the lock contract and its cost. Some lenders may charge you an up-front, non-refundable fee should you withdraw your application, if your credit is denied, or if for some other reason you don"t close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, a fraction of a percentage point or a higher interest rate. Some lenders offer the service at no cost.
How much you pay will vary among lenders depending upon the length of the lock-in period, the options you choose, and whether the mortgage rate is fixed or adjustable and if it"s a purchase or a refinance.
The lock-in period should be long enough to allow for settlement, contingencies imposed by the lender or purchase contract and other factors that could delay the process. Most range from 15 to 60 days. Anything longer could be cost prohibitive.
Before deciding on the length of the lock-in, find out the average time for processing loans and ask your lender to estimate (in writing, if possible) the time needed to process your loan. Consider all factors that could delay your settlement, including the time it will take you to provide requested materials about your financial condition, unanticipated construction delays on a new house and the like.
Once you lock-in a rate, you must make sure that your loan is approved and closed before the commitment expires. Submit a completed loan application to your lender as soon as possible. Follow up to make sure that any additional documents required by the lender (pay stubs, savings and investment account statements, etc.) are sent without delay.