Mortgage rates are rising, squeezing many homebuyers here in high-priced Hawaii.
The popular 30-year, fixed-rate mortgage in the U.S. is now at 4.23 percent, up from 3.71 a year ago, mortgage buyer Freddie Mac announced Thursday.
At current rates, buyers will pay $29.92 per month more than a year ago on every $100,000 borrowed. That equates to $150 a month more on a $500,000 mortgage, even when not factoring the rise in home prices.
In December, Lawrence Yun, chief economist of the National Association of Realtors, declared, “The era of ultralow interest rates is over.”
With rates trending upward since the election and sub-4 percent mortgages getting more distant in the rearview mirror, here are some tips and options for homebuyers affected by rising mortgage rates, trying to keep monthly payments lower or worried about being priced out of the market:
>> Don’t panic and keep perspective: You may have missed capturing the unicorn rates that some of your friends, relatives and colleagues will now brag about for years. So what? While you may have missed the rock-bottom rates, you still haven’t missed the boat. Rates today are still at historical lows. The National Association of Realtors predicted rates could climb to 4.6 percent by the end of this year. If you want more perspective or simply want to feel better, ask your parents what mortgage rates they paid when they were buying. Here’s just a sampling of the rates in the past four decades, according to Freddie Mac:
>> 1977: 8.85 percent
>> 1987: 10.21 percent
>> 1997: 7.6 percent
>> 2007: 6.34 percent
>> Put more money down: To offset rising rates, you can put a larger payment down to make your monthly payments more comfortable and manageable. If you don’t have any extra cash, you might consider a gift from a relative or borrowing from a retirement plan. In any case, you should consult with your loan officer on how this affects your borrowing ability and monthly payments.
>> Buy down the rate: If you plan to stay in the home a long time and have some extra cash, you can pay “points” to lower your mortgage rate. Points, also known as discount points, are fees paid to the lender in exchange for a lower interest rate, which lowers your monthly payments. One point is equal to 1 percent of the loan amount. For example, a 30-year, $500,000 mortgage might have a rate of 4.25 percent with no points. If you’re willing to pay 1 point ($5,000), you might be able to get something closer to 4 percent. Make sure to know what your break-even point is when considering paying points.
>> No handouts? Look for an ARM: While many homebuyers get the 30-year mortgage, few live in their homes long enough reap the savings of the long loan. They’ll either move, refinance or sell their homes well before then. If you don’t plan this purchase as your “forever” home or have a shorter time frame, you might consider nontraditional products out there, such as an adjustable-rate mortgage. ARMs come with a low fixed rate for a set amount of years, such as five or seven, and then rise annually after that. Some local banks have even started offering 10-year ARMs. You can find ARM rates at below 4 percent. There are risks with ARMs, such as higher payments after the fixed period. We saw the downside of short-term loans as unqualified homebuyers overleveraged themselves leading up to the housing bust a decade ago. But lending standards are much stricter now, and ARMs can be an effective tool and save a borrower money.
In any case, it’s best to consult early with your loan officer to discuss the best options for you. And always keep calm as rates rise.
Jaymes Song is a top-producing agent with Better Homes and Gardens Real Estate Advantage Realty in Kahala. He can be reached at 228-3332 or JaymesS@BetterHawaii.com.
