How Low Can You Go?

Published 8:00 am Friday, February 5, 2016

We’ve all been spoiled when it comes to interest rates. They have been historically low for several years. Making the “time to buy” quite true for quite some time. As we entered 2016, however, the Federal Reserve raised interest rates for the first time in nearly a decade. So, where does that leave those looking to buy? And how big of an impact can it have on your home building and buying plans? Our experts break it down.

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“We have had historic lows,” says Ben Leonards with Mortgage Financial Services in River Ranch. “The lowest we’ve had were over the past year and a half — the lowest that they’ve ever been because they have gone up and down in the past few years even creeping up at historic lows.”

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The current interest rate is hovering around 4 percent. But, the general consensus remains that change is coming and the time to lock in is now. Some experts don’t entirely agree. But, realtors like Lucius Hornsby with Keller Williams say February just may be the perfect time to take the plunge. 

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“Generally the rates are lowest in December and January because fewer people are buying houses and the rates pick up from April to August because you’re going to buy anyway,” Hornsby says.

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Leonards says it’s likely rates will increase incrementally in the new year.

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“I don’t guess what rates are going to do. But, rather report where they are,” Leonards says. “The Fed is raising prime for the first time since the iPhone came out and that means there’s nowhere to go but up from here … it’s more important than ever to lock in a good rate while they can.”

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While locking in a rate may only make a minor difference in monthly payments, the crux of an interest rate fluctuation is in how much house you’re getting.

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“It matters more for people that have little margin of error on their qualification,” Leonards says. “A lot of people max out the most they can buy. If interest is at 4 percent and you’re looking at a $200,000 house and then the rates change you could qualify for $180,000 instead and that could be a totally different number of bedrooms or location.”

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Hornsby says buyers got great deals on houses through the winter months, but with the possibility of a hike (even a mild one) in interest rates there is money to be saved by biting before rates rise. The truth, both men agree, is that there are no guarantees. And that, Leonards explains, has to do with the unpredictable nature of our financial market. What was once near science has become increasingly a guessing game with parameters fluctuating that once seemed fixed. 

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“I am of the opinion that the markets no longer run on fundamentals,” Leonards says. “They run off of fear and what the worldwide economy thinks is happening. There are things that happen now in China that effect us.”

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While small changes happen regularly, major movement in interest rates come on the heels of major economic drivers. What those drivers might be and how much it could change the market, however, is anyone’s guess.

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“The bond market drives interest rates,” Leonards explains. “It used to be more predictable because our market ran on fundaments. You can see a shift in the market now because someone gets scared of something on the other side of the world. Nobody knows what it’s going to do. It’s more unpredictable than ever. I’ve been doing this for 12 years and the last time they raised interest rates was before the iPhone came out and during that whole period of time I was screaming from the rooftops that rates were about to shoot up and they never did. Year after that, we saw them freeze. I don’t guess what rates will do. I report where they are.” 

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To put it simply, interest rates are the driver for what you pay on the money that you borrow and they will affect what you pay in the short term and what you pay over time. 

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So, if interest rates are connected to economic factors, could it reason the oil and gas slump in Acadiana could enter the picture? 

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“As long as national is increasing and they are saying we are doing good economically, they are going to increase those rates and talk about increasing those rates regardless of what’s happening locally,” Hornsby says. “Even though our local economy is supposedly not doing well, it’s based on the national.” 

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The seemingly never-ending new construction in Acadiana shows a confidence in our local economy and, again, the time to start that house-building project may be this month. While buying a house gives the buyer a clear number on interest rates, building adds another layer. Builders most often obtain a construction loan and can’t lock in their interest rate until home completion, which means how well you qualify could impact whether it’s in your best interest to build or buy.

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“You often can’t lock a rate during construction. You have a construction loan and then see where rates are when they finish the home and then secure permanent financing. You have a lot more control if you buy an existing home,” Leonards says. “People who build should be better qualified because of potential cost overruns in addition to interest rates. There are just a lot more moving parts on construction financing.”

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Hornsby says February in South Louisiana is an opportune time to begin a building project as winter exits and we have a brief respite before the rain comes.

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“February is ideal because the rainy season is coming to an end and that usually slows down a bit before it starts raining again in April and May,” Hornsby says.

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Just as we discuss the importance of interest rates, our experts give us one final tip:

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Leonards says while interest rates are important they are not everything.

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“Work with a local reputable professional you can trust and you can shake hands with rather than maybe save an eighth or a quarter of a percent,” Leonards says. “Nationwide lenders undercut, because they do so much volume. People bite on that. But, you’re giving up personal service and you’re not keeping your dollars local. Interest rates are very important and you should try to get the best. But, service and professionalism are all equally important. Will your deal close? Will they care about you? That’s up in the air.”

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When it comes to shopping for the best interest rates, Hornsby says there’s no great harm in checking around. 

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“The best thing is to talk to someone you trust, a mortgage broker you know. Some will try to make more money than they should. I would get at least two interest rate quotes from two people. It’s a soft hit on your credit. You’re shopping for the best interest rates and you don’t get a hit for that.”