Mortgage rate trends are always unpredictable, just like recessions and the prices of stock in your investment portfolio. But with mortgage rates in 2018, it seems fairly clear what is likely to happen this year and into 2019, but how will this affect first time home buyers in the near future?
With a hot economy, low unemployment, rising GDP growth and increasing wages, as well as increasing inflation, it seems unlikely that mortgage rates will be going down in the near or medium term. The best that many home buyers can hope for, most likely, is that interest rates will stay in the same range they are today.
According to Freddie Mac, as of October 2018, home buyers can still get a 30-year fixed rate mortgage in the high 4’s. Even though rates have gone up by a point or more in the last 18 months, the fact that you can still get a mortgage in the 4’s is a good thing. Economic activity in the country is strong, and still, interest rates are historically very low.
But if you are thinking about buying a home, you may want to go ahead and take the plunge this year, because the signs are that rates are going to continue to rise. If we look back to rate forecasts from the beginning of 2018, most of them have come true. Most housing and financial authorities said that rates would be in the 4.7% to 5.0% range today, and this is where we are. At the end of September, rates for a 30-year fixed rate mortgage were 4.7%. Many experts believe in early 2019, we will see rates in the high 4’s, with increases into the 5’s expected later next year.
Even though rates continue to increase, there are signs that people are not as scared of this as you might think:
- People’s wages are rising. Even though home buyers are paying higher interest rates, Americans are bringing home more money in their pay checks with the rising economic activity. When you make more money, you are not as concerned about a higher interest rate on your mortgage.
- Unemployment is low. With unemployment well below 4%, many cities have more jobs than workers. When people have plenty of work, they do not worry about paying a bit more on their mortgage payment.
- There is strong economic growth. With GDP running as high as 4% some quarters recently, home buyers do not worry about higher interest rates. It is natural for interest rates to rise when the economy is strong. Very low interest rates are wonderful, but they are usually a sign of weakness in the economy and higher unemployment.
- Home prices are rising. While this might make you think that people will not want to buy a home, rising home prices can actually make fence sitters jump off and get into the market. With the stronger economy, it seems likely that home prices will keep going up. If you decide to wait for lower rates, you could hurt yourself because home prices are likely to keep going up. Some think that we could see a recession in 2020 that could lower rates, but that savings could be wiped out by higher prices.
The bottom line on rising mortgage interest rates is this: In a stronger economy, it is virtually inevitable that mortgage rates will steadily rise. It is a byproduct of people having more money in their wallets and more economic activity in the economy. The Federal Reserve needs to bump up rates to prevent too much inflation, which can really hurt the economy. If the economy is strong, more Americans have more money available, and the higher interest rates do not hurt them as much as some may think. Thus, many people are continuing to buy homes and are not scared of the rising rates.
That said, it may be a smart idea to get into the market soon, because 5% rates are probably not that far away.
New Strategies for First Time HomeBuyers in 2019
The challenge of buying your first home can seem truly daunting. It can be tempting to simply go for the first home that you see that is in your price range or continuing to rent. To help you through the first-time home buying process, we want to examine in this article what you need to think about before you make your big purchase, what to expect from the process and how to make your life easier after you buy your first house.
What to Consider Before You Buy
One of the most important things to think about is what your long-term goals are. How does home ownership fit into these plans? Perhaps you want to stop ‘wasting’ your money on rent and start paying on a mortgage so that you will actually own a property someday. Or, you may view home ownership as a sign of adulthood and independence. Here are some things to think about before you make an offer and commit to a first-time home mortgage:
- What home will suit your needs? Should you buy a single-family home, condo, town-home or even a multi-family building with several units, with one to live in for yourself?
- What features should your home have? Think about the size, number of rooms and the neighborhood. Also consider the layout of the home – should you consider a first-floor master suite?
- How much home can you afford? Before you shop for a home, you should understand how much home you can really buy on your income. There is no point to look at homes that are beyond your price range. That is why it is smart to get a pre-approval for a home loan before you look at homes.
- Who will help you find a house? You should find a good real estate agent with experience finding a good home for people in that area and in your price range.
House Buying Process
Once you have decided to buy a home and you understand the above items, you can now start the buying process. Considerations and strategies:
- Secure financing: You should get a mortgage pre-approval before you do anything else. You will know how much home you can buy when you have a mortgage lender qualify you with your financial documents. Having a pre-approval letter in hand is important as you start to look at homes and talk to sellers and realtors. The FHA-home mortgage is a great product for the first-time home buyer with easy qualification and down payments as low as 3.5%.
- Find a home: Once you know how much home you can afford, you can start looking for homes in your range. Your real estate agent will be able to send you listings that are based upon your price range and criteria.
- Make an offer: Your agent will help you to determine how much you should offer on the home that you want, as well as any conditions that you want to add. If you are in a buyer’s market, you may ask for the seller to pay for some of your closing costs. If the offer is accepted, you will need to make a good faith deposit and begin the process of closing by having your agent set up an escrow account. This is where the seller takes the home off the market for 30 days or so with the expectation that you will buy the home.
- Get a home inspection: You should have the home inspected by a neutral, third party expert before you close on the home. If the inspection reveals any serious defects, you can usually back out of the deal or can ask for more conditions and concessions from the seller.
- Close or move on. If you can work out a deal with the home seller, you can actually close the deal. But if there are any problems with the property, including title issues, you can back out of the deal.
Now that you own your first home – congratulations! Here are some tips to remember now that you have your piece of the American Dream:
- Keep saving money. You will run into extra expenses when you own a home. You might need to replace the A/C unit or the water heater. Keep an emergency fund available for extra home ownership costs.
- Do regular maintenance: If you are a 1st-time home buyer, remember to make sure you take care of regular maintenance items, so you do not have a major financial headache down the road.
- Don’t worry about the housing market: What your home is worth based upon current market conditions does not really matter. It only matters when you sell it.
- Do not try to rely on your home value for your retirement: You may not do as well when you sell your house as you think, so continue to put money into your retirement accounts.
Interest rates on home loans are rising and have reached nearly 5%. You can protect yourself from rising rates if you lock your rate for 30, 45 or 60 days. Check with loan officer to determine the best rate lock for your situation.
Ask about pre-approval for first time home buyers and see if protecting the rate up to 60 days makes sense while you search for the right house. If home loan rates go up, your interest rate remains unchanged. If for some reason the market shifts and rates go down, your mortgage rate will be lowered.