In the year 2000, the rates went up and took many of us by surprise. This year the rates are coming down, and may come down even more, though the jury is still out on how much lower can the rates drop. One thing to remember the mortgage rates and Fed rates are not the same thing, that's why often this year, when Greenspan lowered the rates by .25% of even .50%, the mortgage rates didn't go down or lowered just fractionally. Does it mean that your decision to buy a house should depend on where the rates are? I don’t think so. The rates are in the territory where they will affect your monthly payments to a degree, but you should concentrate on other advantages of owning a house that have little to do with whether your loan is at 7% or at 7.25%, such as the appreciation of the house, mortgage interest deductions on your tax returns, and well-being of your family, which is hard to measure. The truth is that it is not that the interest rates became high in the last year, it is that we got spoiled by the interest rates of 1995-1998 period, and as people easily get used to all good things, we resist the fact that all good things don’t last.
If you look at this as the bad news, let’s now look at the yang of things, i.e. the good news. The good news, is that the lenders are looking at the same picture as the borrowers. And the lenders also got used to fast growth, large diversified portfolios of new loans, and they want to continue to make money and turn steady volume of loans. With the market environment changing, the lenders are becoming more and more aggressive and constantly come up with new programs, qualification criteria expansions, and other positive changes that allow borrowers to buy the house of their dream on the budget that will not break their backs.
There are three things you need to remember when shopping for a mortgage in this or any other time:
(You’ve got to know your limitations (know what you can afford to borrow and how much you can afford to pay).
Spend some time with a pad of paper, calculator and a pencil, or better yet, learn to use computer spreadsheets or personal finance software to figure out different "what if" scenarios and create you family budget. Calculate your worst case and normal scenarios to see if you can still handle your mortgage payments. Don't forget to include property taxes, property insurance, and other applicable payments in your calculations. Never go shopping for a house without knowing how much in monthly payments you can afford!
A word of caution: when you decide how much payments you can afford, make adjustments in your tax withholdings based on estimated mortgage interest deductions from your taxes. Very often you can ask your accountant at work to make adjustments to your tax withholdings to reflect your mortgage interest deductions.
Once you know how much you can afford to pay on a monthly basis, and know how much you can put down (including closing costs and move-in expenses) you can calculate how much you can afford to borrow. This amount can vary based on the type of the loan that you will select [more on the subject – Loan Types]. Involve your mortgage lender in this evaluation process. We, the lenders and brokers, make money not only for finding you the loan but, in my personal opinion, for educating the customers about your best solutions and helping you find those best solutions.
(30 year fixed is not the answer to all your questions, as a matter of fact, 30 year fixed in the time like this is the last option I would consider)
No matter how difficult or impossible your situation may seem, don't give up, there is always a loan product that you can qualify for. It might not be a perfect loan that you would want to have, however, you don't have to stay with this loan forever. It's similar to a person loosing weight: while you loose weight you still might have to wear those pants size 36 and put off buying pants size 33. Your mortgage decision logic should be the same and with the help of a qualified professional you can structure a two- or three-step plan that will allow you to get your dream loan in a relatively short time.
The bottom line is that finding the "perfect" loan is not an easy process, no matter how good your credit is. Approach it with diligence, creativity, and patience, and you will achieve your financial and homeownership goals at the terms suitable for you and your family.
Alex Lisnevsky
Mercury Capital Group Inc.
(760) 757-5070