Say goodbye to those historically low interest rates. If you’re looking to buy a house now, rising rates could be a game changer.
Here’s how to get the house you want and can afford.
Lock and shop: Some lenders have loans that let you lock in a rate before finding a home. However, locks “can be limited to 120 days, which can be challenging to find a property and close within that time frame,” says Elise Leve, senior mortgage banker at Citizens Bank in Manhattan.
Strategize: Make a larger down payment to keep monthly payments lower and offset the increase in monthly payments that a higher interest would bring. “Consider selling some investments to make the larger down payment, but if stocks appreciated there will be taxes due,” says Ed Ichart, a partner specializing in real estate at WeiserMazars in Woodbury.
Think about taking a 30-year instead of a 15-year loan. “Higher monthly payments associated with higher interest rates can be reduced by having a longer-term loan,” says Ichart. You will, of course, pay more interest over the life of the loan.
Buy down your rate: “Homeowners can ‘buy down’ the interest rate” by paying points, says Ray Rodriguez, regional sales manager for metro New York at TD Bank in Manhattan. A 30-year fixed rate loan for $500,000 at 4 percent would have a monthly payment of $2,387. If the buyer paid 1 point (1 percent of the loan amount, or $5,000), that would buy the rate down to 3.75 percent, reducing the monthly payment to $2,316.
Prepare for the worst: When factoring the maximum monthly payment you can handle, use an interest rate at least 0.25 to 0.50 percentage points more than the going rate, to account for a possible increase while you’re shopping for your dream home.