After years of decline to rock-bottom levels, interest rates are on the rise. The average rate for a 30-year mortgage was recently 4.35%, more than a point above the 2012 low of 3.3%.
Whether you’re buying, selling or refinancing a home, here’s how to navigate the new environment.
1. No more record rates, but still cheap loans
If the economy continues to improve as anticipated, rates will keep inching up. Freddie Mac expects the 30-year to reach 4.7% by the end of 2014. IHS Global Insight forecasts that rates won’t hit 6% until 2017.
2. The refi window is starting to close
The rate bump is already cooling off refis, but most homeowners with the equity and stellar credit to refinance have already done so.
If you didn’t have enough equity to qualify, check again — rising prices pushed 850,000 homes into the black in the first quarter, according to CoreLogic. Plus, the recovery may lead lenders to loosen up.
The average credit score for an approved mortgage has been 761, says the National Association of Realtors, up from the normal 720.
3. Higher rates won’t scuttle the housing recovery
At worst, this turnaround will only dampen the pace of growth, says IHS U.S. economist Patrick Newport. A healthier economy is what’s boosting prices. Rates would have to rise sharply to make a mark. “Going up three percentage points would be a major wet blanket,” says Bob Walters, chief economist of Quicken Loans.
With prices rising, sellers can be patient. For buyers, mortgages are still historically cheap.
4. Once you’re ready to buy, lock in
To avoid any short-term spikes, Washington, D.C., mortgage banker Frank Donnelly recommends locking in as soon as you can (typically when you sign a contract).
Most lenders won’t charge for a 45-or 60-day rate lock. Pay for a 90- or 120-day lock only if deals close slowly where you live (ask your lender); the typical cost is a quarter of a point per 30 days. With a float-down option, you’ll pay less when rates fall at least a quarter point. Skip that add-on unless it’s free.
5. Fixed loans usually beat adjustables
You may be eyeing adjustables, which are up less than fixed loans. An ARM is the better call only if you plan to own your home for a short time.
“When you need five or six years, you might save with an adjustable,” says Keith Gumbinger of the research firm HSH.com.
A monthly payment on a $250,000 mortgage is $1,194 with a 30-year loan at 4%, or $999 on a five-year ARM at 2.6%. But it’s crucial to get a loan that matches your time frame.