If the 1 1/4 percentage point interest-rate spurt since August has pushed you to the mortgage-market sidelines, keep one fact in mind: You don't have to be there.
You don't have to miss buying or refinancing a home this fall because rates suddenly seem scary. To the contrary: This month's higher-rate environment can prove to be a better place for you to do business than the languid, lower-rate weeks of this past summer. All it takes is a heads-up approach to double-digit realities.
Make sure you see your local mortgage market in its true competitive light. Mortgage-commitment volume is down significantly in every region of the country -- down from year-ago levels, down from the levels of February and March. Home builders are financing fewer subdivisions; refinancers and first-time buyers are staying away in droves.
What does this mean, especially when everything you read suggests that rates have gone over 11 percent? It doesn't mean that a price war is about to break out among lenders or that anyone is going to hand you money at a loss. But it does mean that somewhere in your local market beat the hearts of at least one or two hungry mortgage lenders, looking to increase market shares with aggressive rates, fees and loan product-lines.
Those lenders may or may not advertise what they're up to. It's likely they won't take out ads in your newspaper's real estate section or business pages. They may not even quote their discount rates over the phone.
Rather than be swamped by the public, lenders building market share in rough weather work through real estate brokers. They send rate-sheet specials to the realty firms they know can bring them qualified borrowers fast. They typically commit a specific maximum dollar figure to the effort -- $5 million, $l0 million, $20 million or more -- and parcel it out, loan-by-loan, until it's gone.
The specials vary widely. They may offer 1 or 2 fewer discount points than normal at closing. (One point equals 1 percent of the mortgage.) They may cut fixed-rate l5- or 30-year loans by half a percentage point or more. They may take adjustable-rate one-year or three-year money below 8 percent, when everyone else has moved to 9. They may offer lower margins on adjustables, and rate caps of 1 percent per year rather than 2.
Whatever the case, your strategy should be the same: Rate shop this month by calling real estate brokers rather than lenders. Far more so than during the summer, top-quality sales associates and brokers at the most aggressive realty firms are going to have access to the most aggressive financing packages. They can save you big bucks.
A second approach for the current environment: Don't be afraid to dust off some of the cost-cutting techniques used successfully in higher-rate periods earlier in the decade.
For instance, loan assumptions may be more widely available than you suspect. Not only are existing Federal Housing Administration and Veterans Administration mortgages assumable, so are many three- and five-year adjustable loans. Why take over somebody else's adjustable? It may have a better combination of rate and terms than you can get in the regular market today.
Say the house you want to buy has an existing adjustable on it with two or three years left, at between 9 and l0 percent. If it gives you below-market, fixed-payment peace of mind for that long, why not assume the loan? When the term is up, either refinance into a one-year adjustable or go for a fixed-rate, depending on where the market is at the time. Meanwhile, you'll have the house you wanted despite the chill winds blowing in the fall of 1987.
Other storm-tested techniques to know about include buydowns from builders and seller-participation in your financing. A buydown from your new-home builder typically is a rate subsidy that phases out over a three- to five-year period. In a market with 11 percent fixed rates, builders may offer 8 to 9 percent first-year rates. The monthly cash differential in mortgage payments between 11 and 8 percent is borne by the builder. In subsequent years, the rate subsidy would phase out to zero.
Individual, nonbuilder seller participation in your financing can range from a buydown to provision of the principal or secondary loan itself. Either way, the objective is below-market-rate financing for the buyer. In this area, make sure you have competent advisers helping you structure the transaction, including realty brokers and legal counsel.
Finally, while you're making up your mind about plunging into the mortgage market this fall, don't ignore the most widely available cut-rate loan around: the rate-capped convertible adjustable. Well-priced one-year adjustables still carry a 2 1/2 percentage point discount below fixed-rate 30-year loans.
The convertible option -- allowing you to turn the loan into a fixed-rate mortgage sometime during the first five years -- typically costs nothing up front.
Granted, an adjustable-rate mortgage may not be your first choice. It may not be your ideal sleep-tight-at-night home-financing solution.
But with rate caps and single-digit interest costs for at least a year, it may prove to be one of your smartest choices. It'll put you in a house and get you off the real-estate sidelines.