As we inch toward the end of the year, consumers and lenders alike begin looking toward the post-holiday season – the start of 2017 – and the potential for a home purchase in the coming year.
But whether this is your first home purchase or your seventh, home lending in 2017 promises to be different from recent years. On Wednesday, the Federal Reserve increased interest rates by 0.25 percent, or 25 basis points, the first increase since last December, making it the second rate hike in more than a decade.
"The bigger implication here is that I think in 2017, [the Fed] will continue to raise rates," says Bob Johnson, president and CEO of The American College of Financial Services.
But Johnson notes that homebuyers shouldn't assume they've missed the boat on securing a good, low-rate mortgage. Mortgage rates are independent of the Fed-set interest rate and fluctuate from week to week. Following Election Day, for example, mortgage rates increased by 37 basis points in a week.
"People overweight the recent time period in making financial decisions, and in the recent time period, rates were at an unprecedented low level. In fact, people were calling it the new normal," Johnson says. "People were becoming very comfortable in a low-rate environment and expecting that to continue long into the future."
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Yes, the days of near-historically low-interest rates are gone, but it's important to keep in mind that the low-rate environment homebuyers have enjoyed over time is a result of a recession that has been difficult for the U.S. economy to recover from.
"Interest rates going lower is generally a function of a bad economy," says Brian Colon, a loan officer with Supreme Lending in Delray Beach, Florida, adding that hopefully, we won't see something similar in the near future.
If you're hoping to purchase a home with a mortgage in the next year, the best advice is to start getting your finances in order as soon as possible and shopping around for lenders that would be a good fit.
"There is no 30-, 60-, 90-day window that is the most optimal. Certainly, the sooner you can start putting your ducks in a row, the easier it will be," Colon says.
Acting now can also give you an idea of your mortgage options. And an understanding of how your financial situation translates to available mortgage programs can mean the difference between buying a home with three or five bedrooms, or looking at single-family, detached homes rather than condominiums.
"The sooner they start speaking to a mortgage professional, the sooner they can know what options there are, and the better path they can put themselves on in terms of knowing what's available," Colon says.
But getting a head start with prequalification or preapproval for a mortgage won't guarantee you the interest rates you're seeing today, as you can only lock in a mortgage rate for a loan when you have a property and scheduled closing date. If you're not planning to buy until spring, expect a subtle increase in rates between now and then.
Colon says he's working with clients who began the process back in September and October. "Now we're having a conversation that interest rates are no longer 3.5 percent – today they're 4.25 percent. So there's a little sticker shock there, but ultimately you cannot lock in a loan until you have a contract, an address and a close date," he says.
The expected steady increase of interest rates could also affect more marginal borrowers, says Tim Manni, a mortgage expert at personal finance site NerdWallet. "They might need to look at a different neighborhood or a different style of home because, obviously, a rising rate is going to affect the affordability somewhat," he says.
All homebuyers should be as proactive as possible when it comes to understanding how their financial standing appeals to lenders, but here are three groups of buyers who should absolutely start now.
Anyone insecure about credit status. If you don't know your credit score, and especially if you're a little afraid of what it might be, begin speaking with a mortgage professional now about your options.
If you have bad credit, it's possible you won't qualify for a mortgage rate you can afford on a monthly basis. By addressing the worst early on, you can work with a financial advisor and take the steps to get on track toward homeownership.
"A lot of folks that know that they have credit challenges, or think they might have credit challenges, try to hide it for as long as possible because a lot of times they don't want to face it," Colon says. "But the reality is they need to face it so that you can actually start taking proactive measures to get it fixed and get yourself in a position to qualify."
Small-business owners. Tax season is almost upon us again, and many self-employed consumers are already working with their accountants to ensure everything is in order for filing by April. Colon says it's important to keep that potential home purchase in mind when looking at how deductions and adjustments are made for the previous year – it could mean the difference between qualifying for a mortgage and not.
"For your self-employed borrowers, before they file their tax returns, they should really be having a conversation with a mortgage professional to make sure they are in a qualifying scenario," Colon says. "And if they're not, what can they do when they're working with their accountant to maybe show more income, not take as many deductions and push off some expenses to next year instead of this year, to get the tax returns more in line with qualifying."
Homeowners with adjustable-rate mortgages. The expected continued increase in interest rates over the next year means homeowners with existing, adjustable-rate loans – whether it's a mortgage or home equity line of credit – would benefit from refinancing to a fixed rate.
"Adjustable rates can play really well in the market, and they can play really well when you're in a period of lower rates," Manni says. "But these things start to get hairy once rates become a little bit unpredictable."