A lesson on mortgage rates and why now is the time to buy
With inflation on the rise, now is the best time to lock in your mortgage or construction loan.
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Low interest rates have fueled incredible demand in the housing market over the past year and a half. The Federal Reserve has continued to keep rates low and monetary policy accommodating due to the effects of COVID on the broader economy, but with inflation rising faster than expected, many market experts have been predicting that the central bank will soon begin reining things in to prevent inflation from getting out of hand.
Fed Chairman Jerome Powell validated those predictions after the Fed’s FOMC meeting concluded today. Powell said the Fed will soon begin slowing the pace of its monthly bond purchases it instituted to support the sagging economy at the start of the pandemic. Most market watchers expect that tapering to begin in December after the Fed’s next scheduled meeting in November.
Powell also updated the Fed’s quarterly projections for raising the key short-term interest rate, which influences many consumer and commercial loans. That rate has been pegged to near zero since March 2020. Powell’s guidance today reveals that Fed officials now expect to raise their key short-term rate once in 2022, three times in 2023, and three times in 2024.
What does all this mean for the Joe and Jane Citizen who are looking for a new home? It means that right now is the perfect time to lock in that mortgage or construction loan. Rates are hovering near their all-time lows, and whether you’re looking to buy an existing home or build a new one, you’re probably not going to get a better rate than what’s available to you at this very moment.
30-year mortgage rates range from the high 2’s to the very low 3’s. 15-year mortgage rates are planted down in the low 2’s. With the Fed’s announcement, you can expect rates to start climbing higher sooner rather than later. Even a small rate increase can make a big difference in what you pay per month and over the life of the mortgage. For an example of this, take a look at the handy infographic on the above left. Now, no one is expecting interest rates to climb as high as they were in 1981 when they topped out at 18.63%, but the home prices depicted in the graphic and the rates shown should prove eye-opening. Even a small rate increase can have a big impact on mortgage payments.
Using the median home price for 2021, which is $269,039, let’s say mortgage rates go up to 3.87% from the 2.87% used in the example infographic. That increase would drive your monthly payment up to $1,011.48 from $892.40 and the total amount paid over the life of the mortgage to $364,133.33 from $321,265.06. Let’s say mortgage rates go up another percentage point to 4.87% – still incredibly low by historical standards. That increase would drive your monthly mortgage payment up to $1,138.37 and the total amount paid over the life of the loan to $409,812.51.
Additionally, banks have some fantastic lending options for qualified buyers right now, particularly on construction loans for new homes, but as the Fed starts tightening monetary policy, banks will begin tightening their lending criteria too. So, don’t wait too much longer before trying to secure financing for that new home.
Todd Corley is an account manager and mortgage loan originator at Drummond Community Bank, one of the preferred lenders we use at Homes by AnnDavid, Inc. for financing our own real estate deals. We spoke with Todd about some of the specifics of their consumer construction-to-permanent loan package.
“Buyers can lock in their rate up-front at the time of the construction closing, which is currently at 3.75%,” Corley said. “We offer a ‘float-down’ rate once construction is complete at the transition to a permanent mortgage,” meaning that if mortgage rates are lower than the construction rate, the buyer transitions down to the lower mortgage rate. Other specifics of the program include:
A conventional 5% down program and the land can be used as that 5% downpayment
You can exclude your current mortgage payment from your total ratio’s if you are selling the home at the time of transition to a permanent mortgage
You can pay down the loan amount at time of transition to a permanent mortgage without any penalty
This is a one-time close product, meaning you pay closing costs one time without the cost of two loans – the construction loan and the permanent mortgage
In light of Powell’s statement on the Federals Reserve’s plans, it’s clear the central bank feels the economy has improved significantly from the beginning of the COVID pandemic. The need for the measures used to support the labor market and get people back to work is waning with nearly every business in the country seemingly hiring and a plethora of workers coming off generous unemployment benefits. The Fed is now going to begin slowly winding down its bond-buying and low interest rate policies and transitioning toward policies that will tackle inflation that’s expected to be running at 4.2% – more than double the Fed’s target of 2% – by the end of the year.
If your plans are to buy or build a new home, the time to act to secure financing for that transaction is now, before rates start to rise.
– Todd Corley, account manager and mortgage loan originator at Drummond Community Bank, can be reached at (770) 900-7248.