The Real Deal
Investigate all options for best interest
By Aida L. Merrill
To slow down an "over-heated" economy, the federal government has raised interest rates several times in the past few months with the largest increase occurring in May. The prime rate now stands at 9.5 percent, the highest it has been since 1991. Over the last 12 months, the flurry of real estate activity was driven by a combination of high demand and low interest rates. While interest rates have increased, demand for homes has not slowed down that much, especially in the San Francisco Bay Area.
Homebuyers in the market today should consider all financing options in this changing interest rate environment. Automatically focusing on a 30-year fixed rate, while the proper financing tool for some, may actually reduce the amount of home a buyer can purchase. In many instances, for most borrowers not holding their original loan more than 3 to 5 years, the fixed rate may be the most expensive loan option for them. A lender should be prepared to discuss all available options with a homebuyer, rather than focusing on one type of loan. If your lender does not disclose the various options, find another one. A home is probably the most expensive item you will ever buy, so shopping for a loan should be an integral part of a potential homebuyer's process.
There are such wide differences between qualifying for a fixed rate loan and an adjustable rate mortgage (ARM), that a family with a combined income of $100,000 may find as much as a $100,000 gap in their purchasing power. The reason for this is that the qualifying "guidelines" applied by most lenders are less flexible on fixed rate financing than with an adjustable rate mortgage. That $100,000 can make all the difference in finding the home you want, so, let the home you want dictate the financing.
In the local market, where home prices are sky-high, it is wise to request that your lender talk to you about all available financing. Have them explain the features and benefits of the different adjustable rate products they have in their portfolio. When discussing ARM loans, realize that your interest rate is determined by adding an index and a margin. The index can vary, but the margin is a constant number through the life of your loan. Therefore, the margin may well be the most important component of your adjustable rate loan. With margins remember, the lower the better. Another issue to consider is the index. Is it considered a stable one? Typically, the most stable indices are the 12-month Monthly Treasury Average (12MTA) and the 11th District Cost of Funds. Compare them both before selecting the one that is right for you.
Hopefully the rates have stabilized for awhile, which will make the availability of mortgage money better. The issue is selection. Homebuyers should take an active role in understanding their options and choosing the most advantageous financing package for their particular situation.
Guest columnist Aida L. Merrill is a senior loan consultant for Washington Mutual Bank. Information provided in this column is presented by the Silicon Valley Association of Realtors. Send questions to: Your Realtor and You, c/o SILVAR, Palo Alto District, 345 San Antonio Road, Los Altos, CA 94022; call 650.949.9115; or send email to: ppompei@siliconvalleyrealtors.org.
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