Mortgage rates have escalated recently. The 30-year fixed-rate average, the most popular mortgage product on the market, is nearing 5 percent, according to the latest Freddie Mac data. The last time the 30-year fixed was that high was 2011.
Indications are that they will continue to move higher, leaving many homeowners and buyers wondering what rising rates mean for them. I spoke to Craig Strent, CEO of Rockville-based Apex Home Loans, to ask him for some practical advice for anyone considering buying a home or refinancing a mortgage. Our conversation has been edited for clarity and length.
Q: Mortgage rates are higher than they’ve been in seven years. Did I miss my chance to get a low rate?
Strent: No. Rates are not at historic lows anymore, but they’re still historically low in general. And if you’ve been in your home for a while, you might still be overpaying. When people talk about quote-unquote rates they’re referring to the 30-year fixed, which is essentially the most expensive mortgage you can get. You may not need a 30-year fixed.
Rates in general are up, but maybe your rates wouldn't be up. For example, maybe you bought your first home five or six years ago and your family is now expanding and you're thinking about moving in the next three to five years. Well maybe it's time to come out of that 30-year fixed and go into something like a 5/1 [adjustable rate mortgage].
People talk about this word “rates.” But rates typically means the 30-year fixed. Historically the 30-year fixed has been 7, 8, 9 percent depending on the year. Just remember 6 percent was a gift in ’06, 7 percent was awesome in the ‘90s and 9 percent was unimaginably good in the ‘80s. Don’t forget 5 [percent] is not 5 [percent]. The rate is not the rate because you’re deducting the interest. So the actual cost is lower.
Q: Why are mortgage rates rising?
Strent: I’m not an economist but basically the recent jump in rates is because of low unemployment, which is indicative of a strong job market, which is indicative of a strong economy. A strong economy generally results in higher rates. What I often say to people is mortgage rates like small doses of bad economic news. When we get small doses of bad economic news, rates go down. When the economy is roaring, money often comes out of bonds into stocks and rates move in the opposite direction. Last week was a little messy because of the jobs report, the lowest unemployment in 49 years, and rates really did bounce up. It doesn’t always move in lockstep but generally speaking a strong economy means rates will be rising.
Q: This is an unfair question because I’m asking you to look into a crystal ball and tell me how high the rates are going to go.
Strent: If I knew that. . . . The last time we saw short-term rates rise over a few years, long-term rates [mortgage rates] actually stayed stable. The truth is I’m not going to even try to answer how they’re going to go other than to say macroeconomically as the economy does better, rates tend to rise.
Q: All these people have been sitting on the sidelines trying to time their refinance. Did they miss their chance?
Strent: Ok, so . . .
Q: You may have already answered this question in your first response.
Strent: I did. I don’t think you missed your chance to refinance. If you’ve been in your home for a while and you have not refinanced yet, you could probably still save money by doing so, depending on what your plans for the house are.
Q: How can I get the best interest rate for my mortgage?
Strent: The first thing I would say to people is that we make our mortgage payments in dollars, not in rates. The question you want to be asking yourself is how can I get the lowest cost for the time in which I’m going to live in the house. A lot of first-time buyers live in the house five to seven years and they take 30-year fixed-rate mortgages. So by definition they’re overpaying because you’re taking a 30-year fixed and that’s the most expensive mortgage. You’re paying a premium. If you’re only using the money for five, seven, eight, nine years, then you just overpaid. You paid for 20 years of fixed-rate protection that you didn’t need, and nobody likes to overpay for anything, particularly a mortgage.
I would reposition it to say the lowest cost versus the lowest rate, and then align your mortgage not with the time in which you're going to live in the house but with the time in which you're going to need the mortgage. If you're paying [private mortgage insurance] or you're going to take two loans, you may wind up refinancing when you have some appreciation. Match the mortgage type up for the period in which you need the mortgage.
You should tell your readers that right now there are a lot of options. There's five, seven, 10 and 15 ARMs. The 15-year ARM is becoming more and more popular. It is not the 15-year fixed. But [an adjustable rate] mortgage has a rate that cannot change for five, seven, 10 or 15 years. Most 30-year fixed-rate mortgages do not even make it to year 15. A 15/1 ARM, which is a 30-year mortgage with a fixed rate for the first 15 years, with no balloon but it can change after 15 years. Those are typically priced about a quarter-percent better than a 30-year and they're worth looking at.
Q: A lot of home buyers are scared of ARMs because of what happened during the housing crisis. How are ARMs today different than the ones back then?
Strent: I love this question. The people who got in trouble with ARMs, for the most part, had interest-only ARMs. They weren’t paying any principal. They didn’t have equity. They put zero to very little down and then their home value went the other way. That option no longer exists. You can’t even get in trouble that way if you wanted to. Now, can you get in trouble on an ARM? Sure, you could. But generally speaking people who can get the best types of ARMs generally have some equity in their home. Now the only thing that can be dangerous about an ARM is the rate adjusting to payments you cannot afford. But that should be moot. Because if you said I’m going to live in this house seven years and then I’m moving, I would say let’s get you a 7/1 ARM or even a 10/1 ARM. The rate should be fixed for the entire period of time you live there and you should be done with the mortgage before you even have the adjustment. If you’re worried about ARMs, opt for an ARM where the rate is fixed for a period of time that is longer than you believe you’ll live in the home.
Q: Do I need a really good credit score to get a good rate?
Strent: This is one of the biggest myths. You don’t need a great score to qualify for a mortgage these days. But the better the score, the better the rate.
If I can digress a little, one of the things I wanted to go into is what I think is the biggest myth out there right now, that you need a big down payment. Well, it’s just not true. D.C. Open Doors is a zero-down program. You’ve got FHA at 3½ percent down, and Fannie Mae and Freddie Mac conventional are 3 percent down now. VA is zero down. There are so many programs out there that require very little money down and a lot of these can be done with some damaged credit.
Q: How many first-time buyers put down 20 percent?
Strent: It’s rare. It’s more like 3 to 10 [percent] down. And what people also need to know is that PMI, private mortgage insurance, has become much more affordable in recent years. [If you put] less than 20 percent down, you have to deal with [PMI] in some way, meaning you either have to take two mortgages or pay a higher rate or pay PMI. But what I would say to your readers is the monthly carrying cost of PMI has decreased. If you’re buying with less than 20 percent down, from a financing standpoint, it’s not as expensive as it used to be. There’s a lot of creative ways to pay PMI these days. It used to be you just paid it monthly. Now you can opt for a higher rate. You can finance it on top of the loan. You could buy it out in a lump sum. You could split the premium. You could pay part of it upfront and in a reduced monthly amount. They’ve gotten really creative with PMI.
Credit guidelines have loosened to allow people to get into homes for the first time with smaller down payments, and a little more flexible credit guidelines are currently in existence. Where there is not much change and where it is still pretty tight — and it should be — is debt-to-income ratio, which I would translate as your ability to repay. So, if you’re not putting a lot down and your credit’s good but not excellent and if you can demonstrate your ability to repay, you can get a loan.
Q: Will higher mortgage rates help bring down housing prices?
Strent: So there are two parts to this. In the short term, it might actually push them higher because those people that have been waiting to buy or been shopping for a while they may feel some pressure to get in before rates go up further. And then you have sort of an influx of offers that could, short term, push values up especially going into the fourth quarter where there’s less inventory that could exacerbate it even more.
Longer term, I don't think it's going to have that much pressure in terms of bringing down home prices because we're already short on inventory in general in our region. So I don't really think it's going to have that much of an impact.
Rates are only one factor in the decision to buy. Buying because rates are here or there is not the right [decision] if your plans are longer term, meaning you’re going to live there at least five years or more. The proper way to make a buying decision is to do a detailed rent-versus-own analysis and see what the cost of renting for you is over time versus the cost of homeownership. Every single one of your readers who is thinking about buying should have a rent-versus-own analysis specific to them, their income, their tax bracket, their plan, because there’s no broad answer for everybody.