Yeah, mortgage rates are higher. So what?

Compete with cash buyersWhen Fed Chairman Ben Bernanke opened his mouth on Wednesday at his press conference, the market immediately tanked. He could have said, “Nice day, isn’t it?” and the market would have tanked as well, just not so quickly or profoundly.

What do I mean by “profoundly?” I mean a loss of over three full points in the mortgage bond market over a three-day period. That resulted in an increase of nearly .75% in rates across the board.

If you are a buyer, you may be despairing right now, thinking that the market is passing you by with this latest increase in rates. If you are a Realtor© representing buyers, you may be thinking, “So much for my client base.” Let’s put this into perspective.

If you earn $6,000 a month and have excellent credit, you would have qualified to buy a $440,000 home when the rate was 4%. Now that the rate is closer to 4.75%, your maximum purchasing power has dropped to $410,000. But here’s the thing: those numbers assumed you would buy at the very top of your ability to qualify for the loan. In my experience, few people do buy up to their maximum; they decide on a payment they are willing to make, then use that number to narrow down their choices. In my experience, that “target payment” is somewhat elastic. When a buyer finds her dream home, she often expands her comfort zone.

If you have been looking for a $400,000 home and plan to put 3.5% down (FHA), your total payment would have been $2,750 with a 3.75% rate. Now that the rate is closer to 4.5%, the total payment will be $2,924—a $174 increase. Uncomfortable? Maybe. Deal killer? Not necessarily. Especially in this recovering real estate market (see “I think we should wait”).

What are the best strategies for this “new” market, with “high” mortgage rates? First, as a buyer (or buyer’s Realtor©), you should step up your efforts to get an offer accepted. Please remember, by the way, that there is no such thing as a “perfect” house. We make a home perfect when we bring our love and energies into it. Even though prevailing over multiple-offer situations and competition from cash buyers is challenging, it can be done. You should read “Secrets of Successful Buyers” for some important tips.

For homeowners hoping to refinance: your window may have closed, but if there is a possibility of improving your financial situation by reducing the cost of your mortgage, you should act now. It is very unlikely we will see rates significantly lower in the immediate future. With the nice increase in real estate values, this could well be your opportunity to get out from under mortgage insurance. Do. Not. Wait.

In my 23 years of originating mortgages, I have always found it interesting how people reset their concept of what “normal” is. Mortgage rates were at historic lows for two years—there was even a long period when lenders were paying a rebate of 2% to buyers when they got a 3.25% FHA or VA mortgage! Now, rates are a bit higher. But I promise you: the sky is NOT falling. Real estate—both home ownership and investment—is still a spectacularly good investment.

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