In the last few months, 30-year borrowing rates have increased from approximately 3% to 5% - basically a 2-point increase%! While 5% isn't particularly high by historical standards, it's much higher than rates have been in the last decade and especially in just the last year. This sharp increase in interest rates drastically increases the monthly payment of borrowers - roughly a 13% increase in monthly payment for every 1-point increase in the rate. We don't want this for our home buyers, and we wanted to suggest a product that may help you to combat these rising rates.

Normally a fixed-rate mortgage is considered the safest and wisest product when shopping for a home loan. However, given current conditions, an adjustable-rate mortgage may actually be more advantageous to you as a borrower for at least five reasons.

1. The spread between a 30-year fixed rate and an adjustable rate is significant. As an example, a 7/1 adjustable-rate mortgage (ARM) is around 4.1% today compared to 5.0% for a 30-year fixed rate. That equates to $322 per month in savings for a $600,000 loan!
2. Unfortunately, home prices are not expected to come down any time soon. Costs continue to rise for houses and pretty much any good or service we purchase. Buying a home is a good way to lock in the cost of your housing payment even as inflation persists. An ARM may be the difference between qualifying now for a home rather than waiting and waiting while prices keep rising. A lender will qualify you based on the adjustable rate, which we've already mentioned could reduce your monthly budget by more than $300. 
3. ARMs typically come in with 3-year, 5-year, 7-year, or 10-year term. But, according to the National Association of Realtors, the average home owner moves every 13 years, and in Boise, Idaho they move every 8 years. That suggests that you'll probably not live in your house as long as you think you will. 
4. Even if you were to live in your house for 10+ years and interest rates had actually gone up substantially during that time, your lender could only adjust your rate up at a limited increase one time each year. You would have some protection each year against any drastic upward adjustments in your rate.
5. Today the yield curve is flat or even slightly inverted. The 2-year treasury note is nearly as high as the 10-year and the 30-year bond. This suggests that interest rates are high now but are not necessarily expected to remain high long term.  It is likely that any future adjustment to your ARM will be a downward adjustment, not an increase to your borrowing rate. Your loan will adjust downward every year after the term of your ARM if prevailing rates have dropped. This is a great way to take advantage of falling rates without incurring the costs of refinancing. 

For all of these reasons, we think an adjustable-rate mortgage may be something for you to seriously consider during these current market conditions rather than paying more money for a fixed-rate mortgage or waiting it out while home prices continue to appreciate.

A term that is starting to pop up in housing market discussions is ‘mortgage rate urgency.’ What does it mean?

Simply, you can think of it along the same lines as Fear Of Missing Out. With Inflation hanging around longer than was originally expected and signs that mortgage interest rates will be rising soon, it simply means that buyers are feeling pressure to buy homes now before those interest rates rise.

Are people really rushing to buy homes before mortgage rates rise?

Simply, yes. Ali Wolf is a nationally recognized economist who specializes in Real Estate and Housing. Here’s what she tweeted on October 22:

September’s pending home sales were down 9.6% from the previous year. But don’t forget, last year saw unprecedented numbers of home sales. To compare it to a more reasonable year, September 2021 pending home sales are 31.2% higher than September 2019. AND, If you compare September 2021 to August 2021, you see an increase of 6.9%.

That means that even though home sales have been historically high, more buyers are signing contracts on homes before the interest rates rise and make monthly payments unaffordable.

Once you decide to buy a new home you get to make all kinds of fun decisions – Which neighborhood? One story or two? Quartz or granite counter tops? Painted or stained cabinets? Shiplap? The list goes on and on.

One decision that’s not as fun (and very unlikely to be inspired by HGTV binges) is who to select as a mortgage lender.

There are countless financial institutions who want to lend you money for your next home purchase, and it’s up to you to do your research. Check with friends, family, and existing bank relationships.

But as part of your research, you should also ask your home builder who their preferred lenders are.

A builder’s preferred lender is simply that – an institution that your builder prefers to work with. This is a lending team that your builder trusts to understand the intricacies of new home construction in your area. This is a group that already has a relationship with your builder, has financed other projects, and has already cleared the hurdles your loan is likely to face.

What this leads to is closing your home on time. This means you get the keys and can move in when you plan to!

For instance, if your appraisal is delayed your closing can get pushed back a week or more. A preferred lender will have experience with your builder; your city, county, and neighborhood; local appraisers; and will understand any unusual wrinkles you may face.

Also, a preferred lender often offers special incentives to home buyers. For instance, all Riverwood Homes preferred lenders offer a 1% credit to our buyers!

So do your homework, ask around, and collect quotes. But be sure you ask about a builder’s preferred lender as part of this research.

Riverwood Homes has two great lending partners we trust.

In Idaho, it’s Mark Onnen with Homebridge.

In Washington and Oregon, contact Keith Hobart with Peak Mortgage.

On the May 19, 2021 New Home Insights Podcast presented by John Burns Real Estate Consulting, the host interviewed industry expert Barry Habib of MBS Highway.

In the podcast, Barry presents a different way of considering home affordability. His thoughts are summarized by the Real Estate Consulting website:

• You might see headlines like, “Home prices have increased 10% while incomes have increased by only 4%. Therefore, this market is becoming increasingly unaffordable.” This is a flawed interpretation.
• A 10% increase in housing costs does not require a 10% increase in income to maintain the same level of affordability. A 10% increase in a housing payment of $1,000 is $100. Assuming an existing income level of $5,000, an extra $100 needed for the increase in payment is only a 2% increase in income.

So even though median home prices have increased 10%, since hourly incomes have risen 4% and weekly incomes have risen 7%, those homes are actually more affordable than they have been in the past.

Many homeowners find themselves in a position where they are considering refinancing their mortgage. An article on Yahoo! Finance lists a few reasons why refinancing can make sense - lowering your interest rate, reducing your term, getting out of an adjustable-rate mortgage, or pulling equity out of your home.

With interest rates as low as they currently are, it may make sense to refinance. Depending on what your current rate is, you may be able to break even in a couple of years after refinancing. To determine how far away your breakeven date is, you must weigh your projected monthly savings in interest payments to your upfront cost of refinancing. There are many costs involved in a mortgage refinance, including the loan origination fee, appraisal fee, closing fees, and title insurance. Some lenders offer "no cost loans", meaning borrowers don't have to come out of pocket to pay for loan origination fees. Instead, the lender simply charges an above-market interest rate to effectively amortize that fee over the life of the loan. Even with a no-cost loan, plan on spending at least $2,000 for the other fees any time you refinance. 

We work with several reputable lenders who would all be happy to help you with your refinancing needs. In the Boise market we like to use Kevin Helmick. Mark Manthei and Mark Carroll are both good resources in the Tri-Cities area.