Fixed or adjustable rate mortgage? This is the question. The answer is no longer as clear cut as it was just a few months ago. How can this be? Let’s take a deep dive.
It used to be that you could expect interest rates to be stable and occasionally lower by a small amount. This meant you could take the time to save the money you needed to buy the home you really wanted. In fact, for some buyers, by the time they had saved enough, interest rates had moved down…or at least not at all. With rates so low, it made perfect sense to get a fixed rate loan. It meant locking in your housing payment the 30 or more years.
Today we are seeing the Federal Reserve aggressively raising interest rates. Their focus is fighting inflation. This has caused lenders to raise their rates to individual borrowers. Under normal circumstances, this forces people to reconsider buying a [larger] home. So prices stabilize or perhaps come down a bit. However, the need for space to work from home is driving unabated demand.
Given this continued demand together fewer and fewer homes for sale, prices are continuing to increase. The higher cost of practically everything (lumber, flooring, roofing, etc) is causing builders to reconsider their plans. Now that even home loans are getting pricier, builders worry that if they build it…no one will come! Investors, meanwhile, are busy snapping up every home they can. All of this points to a future where many will rent because they have no other choice. As we are already seeing, landlords have no qualms about raising rents.
The Course For Action
In this light, it is clear that buying a home, even if it is not everything you could wish for, is extremely important. A fixed rate mortgage may price you out of the market. An adjustable rate mortgage with its lower initial rate helps you get into a home before prices go up again. Make sure you understand how often your payment can change and what drives the change. This is called an index. You can even improve on this circumstance by getting a hybrid mortgage. It is called a hybrid because it behaves like a fixed rate mortgage for a few years and then adjusts just like an adjustable rate mortgage does. Why is a hybrid mortgage a good thing in this market? Because it gives you the time needed for the home’s value to appreciate. Once it has appreciated more than about 20%, you can refinance into a permanently fixed rate mortgage.
If you want to explore Fixed Or Adjustable scenarios and come out on top, contact me at 760 622 5087 or email@example.com