With the news that mortgage interest rates are now on the increase, all potential first-time buyers should be on the alert. The dilemma of "should we buy now while the interest rates are low, or should we wait and see if house prices drop further?", is over.
There is now a new dilemma: will mortgage rates go so high that we can't afford to buy a house? For first-time buyers there is one advantage here: now that the mortgage interest rates are going up, house prices may not increase yet.
There are several reasons for this, one being simply that it will become more difficult to get financing; as interest rates go up, the monthly repayment goes up and houses become unaffordable.
A second reason is that those with existing mortgages may now have to abandon their loans, although first- time buyers can avoid this type of situation by choosing financing wisely.
The way to avoid this type of situation is to choose your mortgage 'type' with caution. A 'variable rate' mortgage will often be a few percentage points less and therefore have a slightly lower monthly repayment than a 'fixed rate' mortgage. So why not choose it?
Here's why not: the temptation to go for the lesser repayment is obvious, but the repayment could go up even before you move into the house - or it could stay the same for a year. Do you want to gamble on your new home in this way? Or would you prefer to have the same monthly repayments and know what your monthly budget is - whatever the banks are doing to the interest rate?
One golden rule of life is that when your monthly outgoings match your monthly incomings, everything you pay out must stay the same for you to stay in budget. Even an increase in gas prices can be worrying! Therefore, it is best to pay a few points above the cheapest mortgage rate, to ensure that you lock in your mortgage interest rate so that you always pay the same amount for the duration of the term.
For all those buyers who have not done this, and who have settled for a variable rate mortgage, this increase in the interest rate could signify the beginnings of a nightmare.
For a family with a $400,000 (four hundred thousand dollar) mortgage, an increase of .5% (half a percent) will mean a $100 (hundred dollars) increase in their monthly payment. If the mortgage is on a variable rate and it keeps going up each month, their monthly payment could get bigger month by month.
The words you need in your mortgage agreement are 'fixed rate' or 'locked in' and you also need it to be locked in for several years (called the term). This is because you may not be able to afford an increase for several years, and you will not know what the interest rate will be when you need to renew it in three or five years time. Some fixed rate mortgages will allow a ten year (or more) term.
This period of time, the term, is not to be confused with the amortization period, which is popularly a 25 (or 30 and 35) year time period over which the mortgage is calculated.
A good real estate agent usually has contacts with mortgage brokers, or if you need a second opinion will check over any mortgage agreement for you to make sure that you are signing for a 'fixed rate' that is locked in.
Carolyn Capalbo is an expert military relocation specialist and real estate agent serving Northern Virginia real estate. Visit Just4Real.com to find updated market information about areas in Prince William, including Loudoun County real estate. |
