All over the country, potential homebuyers are breathing a sigh of relief. After two years of soaring prices, record-low inventory, intense competition and all-out bidding wars, the market finally seems to be balancing out.
However, now there’s something else for potential homebuyers to worry about. Interest rates are rising, and the higher cost of borrowing is scaring some people away from the market.
Unfortunately, there will likely be even more interest rate hikes to come. Will the higher rates negate any benefit of lower prices? Mortgages can be complicated. That’s why we put together this guide to help you navigate the different types of loans and find the best option to help make your purchase affordable.
We talked to our mortgage specialist Alexandra Trahiotis, who has been helping clients secure the best rates and terms for over 20 years.
We did our best to throw her for a loop, but there was no question that Alexandra could not answer!
What do you recommend during a shifting market, a fixed-rate or variable-rate, and is it different from a “normal” market?
Alexandra Trahiotis: My advice would definitely have been different six months ago. When the rate was 1.89%, I would have leaned towards a fixed rate. It was so low that you would have wanted to lock it in for as long as possible.
With the current fixed rate of 5.19%, I recommend going with a variable rate because in the majority of cases variable rates tend to outperform the fixed rates on interest costs. This means you would pay less interest overall. I would also recommend increasing their payment up to the fixed-rate payment to offset the interest cost to have more of your monthly payment go to the principal, then interest.
I recommend first-time buyers go with a fixed rate because they don’t have to worry about their payments changing.
It always pays to be an informed buyer, especially as the market changes. Here are some other posts you may find helpful:
- 7 Benefits Of Working With A Real Estate Agent
- Pre-Qualification Vs Pre-Approval: Which Is Better?
- Ready For Condo Life? Here’s What You Should Know
What are some of the pros and cons of variable rates that some people don’t know about?
Alexandra Trahiotis: First of all, the variable rate will almost always be lower, so there are very few downfalls to choosing that route. You’ll pay your mortgage off faster because more of your payment goes towards the principle of your loan rather than the interest.
Of course, some people are concerned about fluctuating payments. With the five central banks, that might be an issue.
However, many other A and B-level lenders provide more flexible options.
- If the rate scales down, more of your payment goes toward the principle.
- If it goes up, your payment remains the same, but more is allocated to interest.
- The only time your payment might change is if the interest rate goes up by a full percentage point. In that case, your lender will make adjustments so that your amortization period doesn’t increase.
What is your advice for anyone who is looking for a mortgage?
Alexandra Trahiotis: I have three tips for anyone who is serious about getting a mortgage and buying a house.
- Get pre-approved.
- Get pre-approved.
- If you haven’t already, get pre-approved.
Not to sound repetitive, but so many clients come to me and have no idea of what they can afford. You don’t know what you don’t know. People assume things, and they shouldn’t.
You have to know how much you can qualify for.
Some people think that they can afford to spend much more than they actually can. Many factors come into play, like how much debt you have, your salary and your expenses. If you have a commission-based job, you can’t qualify based on your best months’ income. You have to take your two-year average. No institution wants you to be house poor, so they look at everything.
On the other hand, some people think that they can’t afford a house at all. I had a retired couple recently who came to me thinking that they wouldn’t be able to buy, but they decided to give it a shot. It turns out they qualified for an $800,000 mortgage!
Now they’re living in a nicer home than they ever imagined they could afford. But they would still be renting today if they hadn’t taken that first step of getting a pre-approval.
Do you have any tips for current homeowners looking to refinance?
Alexandra Trahiotis: To anyone coming up for refinancing, I recommend a thorough financial review with myself, a qualified mortgage broker. For example, if you have a ton of credit card debt, consider rolling it into your mortgage. If you’re making the minimum payment on a card with a 20% interest rate, you will never pay off that debt.
But when you consolidate your debt into your mortgage, your rate drops to 4.8%. You can pay down your debt faster and free up more monthly cash flow.
Everyone should do a regular financial review because you never know what opportunities are waiting for you.
You can get rid of debt or even find ways to grow your wealth.
Another example is investing in real estate. Many people with a mortgage think they could never afford to have a second home.
But you might be surprised at how affordable investing in that second property can be, especially if you have equity in your home.
Speaking of investing, here are some other helpful resources:
- The Market Is Changing. Is Real Estate Still A Good Investment?
- How To Grow Your Real Estate Portfolio in 2022
What are your clients most surprised by when they apply for a mortgage?
Alexandra Trahiotis: I find clients are often surprised by just how much they can afford. People come in with bruised credit or are self-employed. Sometimes people have been rejected by the central banks, and they start to feel pretty discouraged.
For the banks, you must have a pristine credit rating before they even look at you. But you should talk to a mortgage broker because there are so many opportunities you don’t know about. There are high-quality lenders who will help you, no matter what your situation.
There are lenders for retirees, the self-employed, and those with a spotty credit history.
It’s important not to write off your potential before you’ve explored all of your options.
Do you have any other advice to help clients secure the best product?
Alexandra Trahiotis: Once again, I recommend getting pre-approved. It doesn’t just let you know how much you can qualify for – It also enables you to lock in the lowest interest rate for up to 120 days.
I have clients who locked in the ultra-low rates back in March, and they’ve just started looking for houses.
One last piece of advice I have is to try not to be discouraged by the news. All you hear is that interest rates are increasing and making houses unaffordable.
But housing prices are coming down!
Your rate might be higher, but the house doesn’t cost as much, making your payment lower. You have to look at the actual numbers, not just the percentages. In February, you could have locked in 1.4% on a house with a listing price of $1 million. But there was so much competition that you might have had to add hundreds of thousands to your offer. Now, that same house is only $800,000. The rate has increased to 4.8%, but your payments would still be lower.
Even with the recent increases, interest rates are still low compared to a few years ago. I recommend getting a pre-approval to lock in the best rate now. If rates happen to go down when you buy, that’s great news. Your lender will adjust to the lower amount. Locking in your rate now only protects you from further increases and makes buying a home more affordable than you might realize.
If anyone has any questions about mortgage rates, they can reach out to me by email.
Are you ready to start searching for your new home? Our featured listings page is a great place to start.
