New Market, New Loans

For at least the last five years, interest rates have been at historical lows. Coupled with a housing shortage, these low rates have contributed to an increase in the demand for housing, and this increase in demand has led to an increase in housing prices.

Well, things are changing. Rates are rising and so is inflation. Interest rates represent the cost of borrowing money and inflation occurs when the prices of goods and services rise, thereby decreasing the purchasing power of the money you have to spend.

So, what does this mean for the real estate market? Well, higher rates are likely to put downward pressure on housing prices, so houses may not cost as much, but inflation suggests that even if houses cost a little less, you may not get as much for your money.

My recommendation? If you can afford to buy now, then buy now.

As the market tightens, people may not be able to save enough cash for a 20-percent down payment plus closing costs. When that happens, buyers must move from conventional loans to other types of loans. Lenders are risk managers. If they see that you can afford a big down payment, they calculate that you are less likely to default on the loan. Lower risk means lower interest rates.

If you cannot come up with a big down payment, lenders will adjust the terms of the loan to offset the additional risk. They may increase the interest rate and/or require mortgage insurance to protect their investment, or they may offer a variable-rate loan. We may see more of the following types of loans as the market changes.

Federal Housing Administration (FHA) – These loans are often used by first-time homebuyers. They require low down payments and offer competitive, fixed interest rates. They are not difficult to qualify for, but they do require mortgage insurance which increases the cost of the loan.

FHA Rehabilitation – These loans allow homebuyers to purchase fixer-uppers—homes that require rehabilitation. They require low down payments and as renovations are completed, more funds are advanced to cover the cost of additional work on the property. These loans are a little more expensive than conventional, fixed-rate, 30-year loans and they require a few extra steps to qualify, like getting bids for the work to refurbish the property.

United States Department of Agriculture (USDA) – These loans are intended for low-income borrowers and are limited by a maximum income standard. They include a very low down payment, a 30-year term, and a fixed interest rate that’s usually a little higher than conventional rates.

CalVet – These are intended for active service members or military veterans who choose to purchase an owner-occupied home in California. All veterans who served on active duty a minimum of 90 days are eligible. These loans require low or no down payments and a fixed-rate, 20- or 30-year term. Interest rates are typically better than conventional loans.

Veterans Administration (VA) – These are loan guarantees available to active service members, military veterans, or eligible surviving spouses. The terms are similar to Federal Housing Administration loans (low down payments and competitive, fixed interest rates), but they do not require mortgage insurance. There are limits to the size of the loan guarantee. The borrower works with a lender and the VA guarantees the loan.

Variable Rate – Also called an adjustable-rate mortgage (ARM), this simply means that the interest rate isn’t fixed. This is another way for lenders to mitigate risk. If interest rates jump, so does the loan rate. On the bright side, if interest rates drop, loan rates go down, too. These loans can work well for people who typically move every few years.

Anyone who tells you they know what interest rates will do is either stupid or lying. That withstanding, I think rates will continue to go up. So, talk with your financial counselor, your loan agent, and/or your Realtor to see if now is a good time for you to make a move.

If you have questions about real estate or property management, please contact me at or call (707) 462-4000.

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