Mortgage rates are on the rise again, and home buyers are scrambling to keep up.
The Federal Reserve's December decision to boost its benchmark interest rate is just the latest milestone in a months-long, upward trajectory that has seen mortgage rates rise amid expectations of stronger economic growth.
The monthly payment on a $400,000 home has risen $146 dollars, or 8%, to $1,947, since late September when interest rates first began climbing. The rate on a 30-year, fixed rate mortgage is now 4.21%, up from 3.54% some five months ago, according to Bankrate.
And more increases may be on the way, with the Mortgage Bankers Association predicting steady increases over the next year, with rates hitting 5% in 2018.
For buyers faced with rising costs, there are a number of options that can help keep their plans on track, each with its pros and cons, real estate brokers say. These range from considering less expensive homes to weighing whether to take out an adjustable rate mortgage.
"I think we have been very lucky to have low rates for a while," said Sam Schneiderman, principal broker of the Greater Boston Home Team. "It's been great but those good times are behind us now."
Look at something smaller
First-time buyers, who typically are working with tighter budgets, are likely to take the biggest hit from rising mortgage rates, brokers say.
One way buyers can deal with this is to downsize their ambitions a bit and look at homes that are a step down the price rung. In fact, they may have no choice, with lenders suddenly unwilling to lend as much as they were before.
Even so, it's possible to look at something smaller while not giving up on other important goals and needs.
Redfin agent James Garry points to a family he is working with in Minneapolis who has had to make some quick adjustments amid the rate spikes.
His buyer, a pilot for a commuter airline in Minneapolis with young children and a stay-at-home wife, has dropped plans to buy a single-family home and has instead signed a purchase-and-sales agreement for a less expensive townhouse.
That, in turn, has enabled his client to buy in the same good school district he had been previously looking in, Garry said.
"Buyers in the lower price ranges, $200,000 to $400,000 -- they are having to reexamine their budgets," Garry said.
Sometimes picking a different neighborhood, rather than a smaller house, does the trick.
In Columbus, Redfin's Butch Wahlsmith is working with buyers who have decided to buy a home in the still nice, but less expensive, Clintonville neighborhood. They previously had their sights on the more upscale German Village, which is closer to downtown.
"I think it's important to advocate on their behalf and help the work the numbers," Wahlsmith said. "It's O.K. to maybe come down on what you were looking for."
Another approach is to take a look at your wish list and knock a couple items off, noted Kimberly Johnston, a broker in Seattle. That could mean a house with one less bedroom or bathroom than you would have liked, or buying something older and putting some sweat equity into it.
"I think people are going to start looking at the bigger picture - they are going to have shorter wish lists," she said.
Look at financing options
In light of the rate increases, Schneiderman is urging his buyers to touch base with their lenders and possibly get reapproved for a new number.
It might also be time for some buyers to look at an adjustable rate mortgage, an alternative to the traditional, 30-year-fixed-rate loan, he said. The rates on ARMs are typically a percentage point below that of 30-year-fixed mortgages.
With an ARM, you can lock in a low rate for five or seven years, though there is also risk involved. After the term of the loan expires, the rate moves up and down with the market, and that could be significantly higher than it is today, Schneiderman said.
Still, a savvy buyer might salt away some of the money saved with the less expensive ARM and use that to offset any increases in the future, he said.
The Mortgage Bankers Association is already starting to see an increase, with ARMs share of the mortgage market having recently jumped to 6%, up from 4 to 5% previously. That number should continue to rise, especially if fixed-rate mortgages start to climb toward the 5% mark, said Michael Fratantoni, chief economist for the mortgage bankers' group.
"One way (mortgage) applicants adjust is they will choose an ARM," he said.
Time to rent?
While most buyers want to own something, there are others who have been pushed into the market by rising rents. The cost of apartment living has gone up so steeply in some cities that it can be cheaper over the long-term to buy rather than to rent, notes Luis Solis, a real estate broker in downtown Phoenix.
But Solis believes that is about to change, citing a steady stream of new luxury apartment buildings opening up in Phoenix. Many are struggling to fill empty apartments and are starting to come down a bit on rents, but he sees even bigger reductions on the way.
Not alone, several other cities have seen a flood of new luxury rental towers hit the market, including New York, Boston and Miami.
Solis said some would-be buyers might be better off sticking with the rental market and taking advantage of the deals he suspects are just around the corner.
"There are so many apartments on the market there may be a crash, so those prices may be going down," Solis said. "It might take the pressure off people who are buying because it is cheaper than renting."
In the Seattle area, a buyer from Texas recently decided to buy a $2 million house in the city, even though he won't be moving to the Pacific Northwest for a couple years.
The buyer said he wanted to buy now before rates and prices went up anymore, noted Johnston, the Seattle area broker.
Schneiderman, the Boston broker, acknowledges it could make sense for buyers to act now in order to lock in a low rate.
But he would rather have his buyers think carefully about just what kind of house they want. And that means looking for something they will be happy with over the long-term, not just for a few years.
Many first-time buyers think they will be moving up to a bigger house six or seven years down the line and would rather settle for a smaller place in a hip neighborhood like Boston's Jamaica Plain that is in "move in" condition, he notes.
But with rates likely to return to more historically normal - and higher - levels over the next few years, that strategy could backfire, Schneiderman warns.
Instead, it might make sense to buy something bigger now, even if the kitchen is old and tired and the house needs work. The buyers can then make improvements over time.
After reminding clients that rates are "ridiculously low" right now, Schneiderman offers up a warning.
"'What could happen is that we will be having this conversation seven or eight years from now and we could be in 7 or 8% interest rate territory," Schneiderman tells clients. "Then you might not be able to make the move you want to make.'"