Buying a house? Prices will soon be rising for those who wait. And it’s not the fault of the home builders. The Federal Reserve (otherwise known as “The Fed”) periodically raises interest rates to protect our economy against inflation (rising prices for goods and services). Keeping prices low for things like gas and groceries is a good thing, but the tradeoff is higher prices for other things such as credit cards, vehicle loans, and home mortgages. The Fed raised rates 3 times in 2018, with another increase expected in December. The most recent rate increase was ¼ of a percentage point. That might not sound like a lot, but on a large purchase (like a house) it can be substantial. It equates to about $40 more per month on a $250,000 home. Even if you could handle a $40 monthly increase, analysts expect the Fed to raise rates 4 more times in 2019. A year from now, the same $250,000 house might cost you $200 a month more than it does now – all because of interest rates.
There are ways to protect yourself from rising interest rates while your home is being built. The first way is to look for a quick-build home – a house that’s mostly finished and only requires you to select the interior design features. You can close on your home and be moved-in before interest rates go up. The Village at North Glen has a few of these homes available. Another option is to lock in a mortgage rate for the duration of your home construction. This type of mortgage costs a little more upfront, but protects you from rate increases. As a general rule, the longer you need to hold an interest rate, the more it will cost you. In other words, a 12-month rate lock is more expensive than a 60-day rate lock.
Josh Heape, Sales Manager for HomeBridge Financial Services in Phoenix, suggests getting into a mortgage program that combines security with flexibility. “Since longer rate locks cost more, we recommend getting pre-approved now without locking in a rate,” says Heape. “Then, as your house is being built, work closely with your mortgage broker and be ready to lock-in before rates rise (which can often be done in less than 1 day). We also recommend getting a float-down option, which lets you lower your lock-in rate if interest rates drop during construction.”
A little pre-planning can go a long way in securing the best the program to match your buying timeline!