If you are shopping for a new home, you may be nervous about the news that the Federal Reserve is planning to begin raising interest rates.
For many, the uncertainty about when the Fed will start the process is creating pressure to close on a home now—while rates are still at their historic lows.
But with home buying, as with investing, acting out of fear is a dangerous game. Interest rates go up and down over the years, but the price you pay for your home won’t. If you pay too much in a rush to seal the deal, you will likely regret it later.
Let’s gather some perspective about mortgages and interest rates. First, nobody knows for sure when the Fed will start to raise rates. It’s conceivable that it may wait until next year. Fed governors themselves look to economic indicators when deciding on timing, and those indicators change continually.
And once the Fed does act, mortgage rates may not follow. Historically, mortgage rates have not automatically moved in tandem with the Fed’s actions. Consider this: The central bank has held short-term interest rates near zero since 2008, but the rate for a 30-year mortgage has bounced from 3.31% to 5.59% since then.
Furthermore, Fed chair Janet Yellen has signaled clearly that the bank intends to raise rates gradually and in small increments. It’s possible that the Fed will look to nudge rates just half a percentage point over 12 months. That would not seem to presage a dramatic jump in mortgage rates.
As a prospective homebuyer, it’s best to ignore what-ifs about interest rates, and focus on what you can control. For starters, you can choose the type of loan that works best for you.
Adjustable-rate mortgages may have lower initial interest rates than fixed-rate mortgages. Keep in mind, though, that they may be a bad deal if you plan to hold the loan for more than a few years. And of course, the rate can adjust upward, increasing the amount of your monthly payments.
If you choose a fixed-rate loan, you can pay up-front “points” to lower your interest rate. This makes the most sense for those who can afford to pay more up front and who plan to keep their homes for the long run. You should also be able to swing a lower interest rate if you are able to make a higher-than-required down payment.
Your credit score is another important factor that you can control. The better your score, the lower the interest rate you will be able to command. The difference between a FICO score in the 600s and one of at least 750 can be up to a full percentage point.
Finally, it often does pay to do your comparison shopping. Lenders charge different rates based on a number of factors, including how badly they need your business.
If you’re excited about shopping for a new home, you should enjoy the process, forget the headlines about interest rates, and seek to make smart decisions. It will make the process more enjoyable and could just save you money.