Spring is a prime time for house-hunting, a happy and exciting prospect for many people. But here's the dark side: You're likely to find mortgage interest rates have risen since you last checked, which will mean higher monthly payments, a bigger down payment or less house.
The going rate on average was 7.97 percent this week (March 27) for a 30-year fixed-rate mortgage, according to Freddie Mac, a secondary mortgage firm that does a weekly survey. That was up slightly from 7.94 percent last week, but analysts expect rates will move higher still in coming days.Already, banks have increased their prime rate to 8.5 percent, up from 8.25 percent, in response to the Federal Reserve Board's March 25 decision to raise interest rates. If you have an adjustable rate mortgage linked to the prime, your costs are likely to go up as well.
If you're not committed yet to buying a house or to a mortgage, it's a good idea to keep up with the market changes. Mortgage rates have been stable for a long time, but they're likely to move around for awhile now before settling down again.
It seems logical to count on paying at least 8 percent for a standard 30-year mortgage this spring. If these prices put a house out of reach for you, consider a cheaper alternative. A one-year adjustable rate will save you a ton of money in the first year and probably the second, depending on the terms of the ARM and what happens in financial markets.
For example, on the $120,000 mortgage shown in the chart above, your monthly payment with a one-year ARM at 5.71 percent would be just $697 in the first year. If the rate rose 2 percentage points to 7.71 in the second year, your payment would be $856.
Another alternative is a balloon mortgage, which is amortized over 30 years but lasts for a much shorter time, typically 5 to 7 years. Rates on a 7-year balloon last week (March 21) were an attractive 7.45 percent - substantially better than the 30-year mortgage.
There's nothing wrong with a mortgage that comes to an abrupt end after seven years, as long as you plan ahead. If it's a balloon, you have to pay it off with cash or by refinancing or by selling the house.
Such planning is simply common sense but not everyone is up to the chore apparently. In one of its reports, Fannie Mae, a big secondary mortgage buyer, featured a Seattle woman who was going to lose her house because her 10-year balloon mortgage was ready to expire and she hadn't made any plans to pay it off. Happily enough, she was over 65 and counselors helped her get a reverse mortgage.
A final option to cope with rising interest rates is simply to put off buying a house until you can afford one. In the meantime, you can save more for your down payment. There's a glut of houses on the market in many parts of the country so you probably won't have to pay much more - if any - next year than this year.
Freddie Mac reported that housing prices rose 3.7 percent from the fourth quarter of 1995 to the final quarter last year. But that doesn't mean every house increased in price. Look around a long time and you're bound to find some good bargains.