The real estate market is similar to the stock market in the fact that prices on real estate fluctuate. This fluctuation is based on several different factors like supply, demand, the interest rate environment, and the location of the real estate. These, of course, are just some of the factors that determine the state of the real estate market, but they are important indicators of what is happening in the real estate market where you live or where you are planning to buy.
In recent years interest rates have been low, which has sparked an increase in home buying. As interest rates drop, home purchases and refinances usually increase. On the other hand, because of a housing shortage felt in many areas of the country home prices have also increased. This increase in home prices has slowed down the home buying numbers because higher prices knock many buyers out of the market for financial reasons.
So, in a real estate environment where prices are high and rates are low what should buyers do when it comes to obtaining mortgage financing?
Here is where some of the good news comes in. The picture painted above may seem bleak for some, but there is a light at the end of the tunnel.
Adjustable Rate Mortgages
Upside: Adjustable rate mortgages typically have lower interest rates than fixed rate mortgages. Since the interest rate is lower, and the payment is figured using a 30 year amortization, the monthly mortgage payment on adjustable rate mortgages, are usually lower as well. During a low interest rate environment getting into an adjustable rate mortgage will allow you to spend less money on your mortgage and allow you to be able to afford the higher mortgage amount that will be incurred because of higher housing prices.
Downside: Obviously, the interest rate is subject to change, but there are caps on adjustable rate mortgages that limit the amount that the rate can change. And in the interest rate environment of today rates seems to change in small increments, which will usually fluctuate your payment in small increments as well.
Interest Only Mortgages
Upside: The invention of interest only mortgages have allowed buyers to be able to afford to buy a more expensive house than they would normally be able to afford. Since the monthly mortgage payments on these mortgages require only interest, no principal payments are required. Even on a principal and interest fixed rate mortgage, very little of the monthly mortgage payment is being applied to the principal anyway. Since interest only mortgages usually carry a lower interest rate than a fixed rate mortgage, it is a win-win situation because the monthly payment will be lower based on the lower interest rate and the fact that only interest is required to be paid. In the times of today, where US residents move every 5 to 7 years, it is not necessary to make principal payments, because even on a 30 year mortgage where principal portions are required, very little will have paid down on your principal balance in the 5 to 7 year period anyway.
Downside: There are not any automatic principal reductions on this type of mortgage, but principal payments are allowed. You just have to be disciplined in making principal reductions if that is your goal.
Fixed-to-Adjustable Rate Mortgages
Fixed-to-adjustable rate mortgages are another type of mortgage that can help you to lock-in your interest rate for a fixed period (usually 1, 3, 5, 7, or 10 years). In an interest rate environment where rates are low you may want to lock-in your interest rate to insure that the rate will not fluctuate if and when interest rates go back up.
Upside: Lock-in your interest rate at a low interest rate and you do not have to worry about the interest rate going up for that fixed period.
Downside: If you keep the mortgage after the fixed rate period then your interest rate is subject to change.
