After hitting record lows this spring interest rates are slowly starting to edge back up. The newspapers, television and radio all report very seriously about “10 year treasury” this and “long term government debt” that, but what does that all mean to you and me?
Banking bigwigs are worried that rising interest rates could push house prices lower and hurt profits, signaling a rise in inflation and increased borrowing costs slowing home financing activity. That’s hard to decipher. Here’s another sample of interest rate jargon: “The volume of mortgage applications filed this season dropped a seasonally adjusted 18.9%, as refinancing activity has plunged, Meanwhile, the week-to-week pace of applications filed for mortgages to purchase homes was down a seasonally adjusted 4.5%.”
It’s almost like they don’t want us to understand how the interest that you and I pay everyday are calculated. While it’s not something we may think about often, interest rates affect a large part of our lives. Those rates revolve around The Fed, or Federal Reserve System, which was created by the US Government in 1913 to govern the banking industry and it is charged with maintaining the nation’s financial system. When the economy is growing quicker than what the Fed wants, and there is a threat of inflation, the Fed will usually raise interest rates. Then, when the economy cools and there’s the risk of a recession or, God forbid, a depression, the Fed will lower the interest rates in an attempt to spur growth.
When the rates are increased, the banks pay more for the money they borrow. That means they charge you more money when they loan you money. Again, the other side is that when the costs to the bank drop, so will the costs to you.
So, has the recent rise in rates put us off investing in real estate? Yes.
Should it have? No.
While you might be concerned by the recent rise, let’s be honest: interest rates are still pretty good — we’re just comparing them to the bargain bin rates of spring. We’ve enjoyed basement-level interest for a while but if you still feel you’re at the mercy of rising rates, you do have options to keep those rates and payments low, and you might be able to help yourself to some savings.
First, don’t panic. Mortgages are notoriously fickle. While it’s true that interest rates rise much more quickly than they fall, even a sharp jump in one day or week can be erased over the next week or two, and since most early mortgage payments are tax-deductible interest, you’ll recoup some of that on April 15. And remember that house prices are still the best they have been in years.
Next, do your homework. Research banks who offer the best rates and mortgage brokers who you might be able to negotiate with, but don’t get pushed around by lenders who want to offer you more than you can afford. Keep your housing expenses below 35% of your total income.
Then, think ahead. Hunt down those tax credits and remember that your credit score matters. A score below the mid 700’s could lead to higher rates or denials, so work to improve it by paying bills on time and lowering your debts.
And save for that down payment, the more the better, and if you can put down over 20% you can make a big savings on your private mortgage insurance payments.
And finally, be comforted. Rising interest rates are actually often a harbinger of good things to come. Yes, an uptick in interest costs can slow a galloping economy. But in slower times, like we are in now, higher interest rates usually signal better economic times ahead, not worse.
Interest rates are up, signaling better times ahead, but not so much that you can’t still get a good deal out there, so if you can manage your income, manage your debt and your credit profile is good, this could be a great time to hop off the fence and into a home.
