When you're shopping for your first house and mortgage rates start to rise, panic can set in quickly. Rising rates may put the property you want out of reach or, even worse, knock you out of contention altogether.
So it's a good idea to prepare for the worst, advises a Scripps Howard News Service real estate columnist. If you know you're near the edge, having barely enough income and down-payment money to qualify for a mortgage, explore the alternatives that might make a deal possible after all.
For example, on a $130,000 mortgage, your monthly payment could be as high as $917 a month or as low as $780.
The most expensive mortgage loan carries a 30-year fixed rate. You pay a premium for the privilege of knowing that your monthly payment will never change. If rates do rise, that's someone else's problems, not yours.
A 30-year fixed-rate mortgage can be fairly pricey, averaging about 7.6 percent. With a $130,000 mortgage, that would give you a monthly payment of $917. If that's out of the question, you could opt for a one-year adjustable loan with a payment of $780 a month, a savings of $138. But keep in mind that this rate may go up just one year from now. That can be risky, especially for new homeowners without a lot of financial reserves. Before signing on for a one-year adjustable, figure out with a lender the worst-case payments for the next couple of years.
You might be much more comfortable with one of the hybrid mortgages that offer a little more safety and a little higher rate. You can get a 5-1 hybrid, for example, that has a fixed interest rate for five years before turning into a one-year adjustable. Similarly, a 7-1 hybrid has stable payments for seven years.
If you decide on a hybrid mortgage and think you'll be in your house when the fixed-rate period ends, make sure you know how the annual adjustments work. "While the adjustable portion of these products normally have standard two percent per year and six percent life of loan limits on interest rate movements, they don't usually apply to the first adjustment after the fixed-rate period," says HSH Associates, a mortgage information company in Butler, N.J. "Rather, that first leap may be capped at four percent or five percent above the rate the borrower is paying.
"This may give you pause, but if you know you're going to sell or refinance during the fixed period, you should at least consider a hybrid ARM."
HSH recommends getting a hybrid that is slightly longer than your sell or refinance time frame. If you plan to move in five years, take a 7-1 hybrid. "Your savings will be less, but you'll have some flexibility."
(Distributed by Scripps Howard News Service.)
