Mortgage Rates Are Soaring. What Financial Pros Say Clients Should Do.

Sarah Ponczek, financial advisor, UBS Private Wealth Management: Timing the real estate market is as difficult, if not more so, than timing the stock market, because the housing market is much more illiquid. So the best time to buy a home is when you feel ready and when you feel as though you can afford it. The first thing you need to do is to take a good hard look in the mirror and truly ask yourself, “How much can I afford to spend monthly on a home?” You have to factor in your taxes and your insurance and your maintenance payments, anything that might qualify as a home expense. A good rule of thumb is that you don’t want to be spending more than 20% to 30% of your pretax income on housing costs. Understand that you might not be able to afford that dream home you could have afforded last year. But as difficult as this can be, it’s best not to try to time your purchase. Rather, just base your decision on whether you can afford those monthly payments. 

Nina Mitchell, senior wealth advisor, The Colony Group: Depending on the home value and the loan amount, we’re favoring jumbo over conforming loans, because 30-year jumbo rates are about 1% less than the conforming-loan rates. Banks want these jumbo loans on their books and are getting very competitive with their rates. The conforming-loan limit is a little over $647,000. Normally, people want to borrow as little as possible. But if you run the math, it may actually cost you less to borrow a little more with the lower rate. And you can use those extra funds toward closing costs, or you can pay down principal a couple months after closing. 

Also, adjustable-rate mortgages are coming back into vogue. The seven-year jumbo ARM right now is about 4.75%. That’s 1% lower than even the 30-year jumbo. And most people don’t hold their mortgage for more than nine or 10 years; they usually refinance it. So based on your facts and circumstances, you can do a seven-year ARM at this lower rate, with the hope that you’ll refi it over the next seven years. That’s another way to lock in a lower rate based on today’s environment.

Another option, and this really depends on your family dynamics, is taking a loan from a family member or a family trust. You just have to be sure you use the minimum applicable federal rate, which is set by the IRS. That rate is significantly lower than banks’ rates. 

Kenneth Van Leeuwen, managing director at Van Leeuwen and Company: We’re examining all the different options to determine the best way to get clients into properties if they still want to buy, and based on their overall financial plan. For a while there everything was a 30- or 15-year fixed. Now we’re looking at a range of options, including adjustable rates and interest-only mortgages. For a younger person or couple, we’re asking if there are any sources they can tap to make a larger down payment. In some cases we’ve seen lately, the client cannot currently afford the home or the condo that they’re looking at, and so we’re telling them to go back and save some more money if they can. Also, the market in certain places has quieted so that it’s not the crazy bidding like it once was. So we’re encouraging clients to see if it’s a $500,000 house, if they’ll sell it to you for $480,000. We’re encouraging them to be a little bit more aggressive on their bids. 

Jamie Hopkins, managing partner of wealth solutions, Carson Group: I always think you should consider buying down points—essentially paying the mortgage company X amount of dollars to get a lower interest rate on your mortgage. Part of that is analyzing whether you have enough cash to do it. If you’re operating under a constrained monthly budget of, say, $2,000, then putting extra money down could allow you to keep within that budget. I also think rightsizing is a good idea for a lot of people, the idea that you can be happier in a smaller house. It can be less expensive, easier to maintain, more cost effective in terms of heating and cooling and all of the expenses that go into it. I do think that higher cost of borrowing is going to drive a little bit of that. 

Lauren Sigman, wealth advisor, Robertson Stephens: I wouldn’t say just outright, “Oh, interest rates are high, don’t buy right now.” It’s a holistic question. First and foremost, your home is a use asset, it is not an investing asset. So I ask clients why they want to move into a new house. Then I’ll look at your balance sheet and cash flow, what can you afford without pinching the rest of your savings goals. And if they do end up having to stretch and spend $25,000 more, we can evaluate that rationally. If a house is already fixed up and it’s 10 minutes closer to your kids’ school, is it really going to make a big difference if the mortgage payment is $50 a month higher? And remember whatever you buy today, you can refinance later, if and when rates go down. I also tell people to get yourself a good mortgage broker to look at a variety of different loan programs. 

If you have an adjustable-rate loan that is about to reset, you can lower your monthly payment by recasting the loan. Let’s say you have a $100,000 adjustable-rate mortgage, and that’s going from 4% to 6%. You can pay down enough to bring that monthly payment down or keep it the same even though the rate is rising.

Nikki Savage, wealth advisor, Sequoia Financial: I would advise clients who are considering buying a house right now to look at their long-term plan and weigh the pros and cons of the market they’re looking at. Different cities are going to have different trends. They might want to compare the costs of renting versus buying in their local market. 

One situation that could be particularly complicated is having an adjustable-rate mortgage right now. There’s so much that’s up in the air in terms of what interest rates will be in the next one to two years. In general I would say if you have an adjustable-rate mortgage, this is a time to reassess your long-term plan. If you are planning to stay in the home for the next 10-plus years, maybe this is the time to reconsider refinancing, to avoid significantly higher rates that could be coming down the pipeline. Then you can potentially refinance again later on if and when interest rates come back down.

Editor’s Note: Answers have been edited for length and clarity. 

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