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Strategies for Rising or Falling Mortgage Interest Rates

Date the rate but marry the house — what does that mean?

“Date the rate but marry the house” is a common refrain and often unknown to buyers. It’s meaning is this: don’t be psychologically committed to one financial vehicle during the duration of your homeownership.

In other words, although mortgage rates tend to dominate the headlines — not only because of the impact they have on many homeowners, buyers, and sellers, but also because housing represents 15-18% of the annual GDP — don’t lose sight of the fact that you are likely to own your home, on average, less than 7 years. During that time, interest rates will fall or increase.

Naturally, if interest rates fall, it makes you happy to have locked in a great rate. If they go up, you can always refinance. The most important part of your decision when purchasing is to find a home which will work for you in the long term.

  • Is it convenient to your workplace?
  • Is it close to friends and family?
  • Do you like your neighborhood and feel happy when you are in your home?

These intangibles, the “marry the house” part of the phrase, outweigh the interest rate you lock in on your closing date, because you are not wedded to it.

Yet it would be foolish to ignore the financial impact mortgages have on your monthly housing costs.

Mortgage interest rates went up for most of last year. While some of the best prognosticators think they could come down, we are unlikely to see cheap money deals again anytime soon. Homeowners in NYC who are holding mortgages anywhere from 2.75% to 3.5% are fortunate.

As I write this article, mortgages are hovering around 6%, which is certainly better than 7% but that is not cheap compared to past rates. Here’s the math:

6% interest rate: If you buy an apartment in NYC for the median price of $1,100,000 at a 6%, 30-year fixed rate, your monthly mortgage payment would be $6,193

3% interest rate: Your monthly payment would have been $1,566 less per month — or $18,792 less per year.

That is a substantial difference.

Still, despite the current mortgage rate environment, to avoid escalating rental prices many buyers are proceeding anyway. They know that when rates come down, they can refinance.

What about buyers who are not planning on staying in their home longer than 5-7 years? Let’s talk about an Adjustable Rate Mortgage (ARM).

The benefit of ARM

If you’re planning on staying in your home for a longer period of time, you might consider an Adjustable Rate Mortgage (ARM) instead of a standard 30 year fixed loan. If you are getting a 7/6 (30 year) ARM Jumbo your interest rate could be around 5.875% for the next seven years.

A standard 30-year fixed jumbo at 6.375% on a loan of $1 million will save you over $3,000/year.

Even if you aren’t planning on selling in five years, buying with an ARM can lower your monthly payments, giving you time to get into a longer-term mortgage in the future at a better rate while you stay in your home. This is a particularly interesting strategy for someone who expects their income will be increasing in the years ahead.

Buying when interest rates are falling

This seems like a great scenario, yet it also needs managing in order to harness the trend in your favor. If you are purchasing in New York City, it can take two to three months from the time you submit your purchase application to the managing agent until the time you get to the closing table.

If you locked in a rate a few months before your closing and you suddenly see rates coming down, you are likely to experience some serious buyer’s remorse. Instead, you should always ask for a free rate float down.

Here is how the scenario can work toward your advantage: In an environment when rates are coming down, buyer demand is likely to increase, driving up the housing prices. If you are negotiating while rates are just beginning to fall, you can negotiate a great purchase price. Why? Because sellers are negotiable when demand is low.

Meanwhile, as demand increases in the falling mortgage rate environment, you simply wait to close and then take the option of your free float down. You will get a great purchase price and a better mortgage rate. You can’t time the market, but you can be strategic.

When buyers and sellers are aligned

While buyers and sellers are on opposite sides of the transaction, their interests are aligned when it comes to mortgage rates. Rising mortgage rates translate into decreasing demand, which ultimately requires a seller to be negotiable.

However, if you’re selling you are not completely at the mercy of interest rates. You can take steps to make your property more attractive financially. For example:

  • If you own a condominium or a townhouse you could offer potential buyers a CEMA (Consolidated, Extension and Modification Agreement). In NYC your buyer will pay a mortgage recording tax which ranges from 1.8% – 1.925% of their mortgage amount. Through offering a CEMA when your mortgage rate is lower, your borrower pays the difference between your existing principal balance and their new loan amount, lowering their tax bill.

Unfortunately, this strategy does not work with co-ops as they are not subject to the mortgage recording tax. Additionally, a property that’s in great condition, looks good in photos and has a sound price and marketing strategy will sell at a strong price in any interest rate environment.

  • Should you find yourself in a market where interest rates are falling, then you can push your pricing based on how much rates are coming down. To be certain your pricing ideas are realistic in a changing market it is always best to consult a local real estate professional with experience in your area. They can help you understand inventory levels, the pace of demand and how recent comps influence your ultimate sale price.

And of course, make sure your property shines in order to outperform the competition.