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Do mortgage brokers act in their customer’s best interest?

Ben Stucker February 19, 2019 2:41 pmApril 20, 2019

By definition, a broker is a person who arranges or negotiates something like a settlement, deal, or plan. It follows that mortgage brokers arrange or negotiate a mortgage. But what does “arranges or negotiates” really mean?

More importantly, does a mortgage broker always act in the best interest of their customer, the mortgage borrower?

These questions come up whenever we meet with financial advisors. Understanding the answer (hint: it is not a simple yes or no) is essential for a fiduciary advisor who wants to remain, well, a fiduciary advisor. Failing to understand this answer results in failing to look out for the best interest of your client.

Let’s examine how mortgage brokers come up with their mortgage rates.

How mortgage brokers come up with rates

A mortgage broker will compare various wholesale lenders when examining loan options for a potential customer. Wholesale lenders (which have approved the mortgage broker as a partner) will supply rate sheets or the raw data to populate loan pricing software.

In this sense, wholesale lenders are just like wholesale suppliers in a retail market. They can have specialties such as “jumbo loans” and rate or pricing differences will certainly exist amongst them.

The graph below represents the wholesale price from three different wholesalers available to a mortgage broker. For our purposes, we’ll imagine there are just three different wholesale lenders being considered for a particular loan. Truth is, there could be many more options considered by one mortgage broker.

To grasp the concept of how this process works we are omitting the actual interest rates. Rather, we are going to focus on their relative position to each other. Note the Y-axis is simply “Interest Rate” and void of specific numbers.

In the case above, Wholesale Lender 1 is offering the lowest wholesale rate given the mortgage customer’s credit, income, and other criteria. In contrast, Wholesale Lender 3 is providing the highest wholesale rate. Lower rates are always better when other things such as origination fees and discount points are held constant.

With an understanding of the mortgage broker’s “suppliers,” let’s move on to how the mortgage broker makes money.

A mortgage broker adds margin

A mortgage broker will add a retail margin, or markup, to each wholesale rate. These two items, when combined, determine the final interest rate presented to the mortgage customer.

Industry compliance and several other factors ensure that a specific mortgage broker earns the same markup on each loan they could offer. As a result, the same margin is added on top of each wholesale rate.

With the retail margins added to each wholesale price, the relative attractiveness does not change. Wholesale Lender 1 + broker margin is still the most attractive loan option. Said another way, this wholesale price and the margin combined will result in the lowest rate for the mortgage customer.

A mortgage broker presents their best option

Mortgage brokers want to present their best option to increase their chances of winning the loan business. They are indifferent as to which option they provide because they generate the same margin in all cases. In this sense, a mortgage broker does “shop” rates in some way. But there is MUCH more to the story.

The fact is, there are many wholesale lenders and a mortgage broker selects a certain number with which to partner. While a mortgage broker may have access to many wholesale lenders, they will NEVER have complete representation.

Other mortgage brokers have their own best options

Each mortgage broker has an individual set of wholesale relationships. These relationships can be based on familiarity, proximity, or any other factor.

Additionally, each mortgage broker must be approved by a wholesale lender in order to offer their products and terms. Some wholesale lenders enforce minimum production requirements in order for mortgage brokers to remain “active” with them. Further, certain mortgage brokers can receive better/worse wholesale pricing based on a range of factors including quality of submissions and volume of transactions monthly/quarterly.

As a result of these factors, each mortgage broker will have access to a “best wholesale price.” Said another way, they will each have a different starting point with which to build their retail rate.

Mortgage Broker 1 has presented the wholesale price that is lowest from his stable of options. Mortgage Broker 2 has access to a lower wholesale price. Mortgage Broker 3 has access to a less favorable wholesale price – the worst of the bunch.

If we assumed (wrongly, btw) that retail margins are all the same, then we see (below) how a wholesale price is related to a lower rate. In these cases, the wholesale price is the main determinant of interest rate for the consumer.

When presented with these options, we should choose to work with Mortgage Broker 2. Due to their exclusive access to the lowest wholesale price (amongst the three), they will provide the lowest interest rate.

A lower interest rate results in lower monthly mortgage payments – who wouldn’t want that?

Retail margins differ between mortgage brokers

Mortgage brokers generate revenue only when they produce loans. All expenses, such as loan officer commissions, office overhead, and marketing/advertising, are paid for from this transactional revenue. As a result, each mortgage broker requires a different retail margin to maintain profitability and the range can be significant.

Operational overhead is one of the most common reasons why retail margins range. A mortgage broker with a large executive team (drawing hefty salaries) will result in the need for larger retail margins.

A mortgage broker paying a hefty monthly “marketing expense” to a real estate office can also be a contributing factor. These monthly fees, called MSAs, are masked from compliance regulators by associating them with “joint marketing activities.” While the legality of them may be increasingly questionable, the funds required to repay this large expense increases the retail margins charged.

Applying the logic from above, let’s take a look at how our Mortgage Brokers made out in a competitive environment.

Mortgage Broker 2 ends up being the worst choice for a mortgage borrower. The large retail margin results in the highest interest rate compared to both other options.

Mortgage Broker 3 ends up with the lowest rate for a mortgage borrower. Their low retail margin means they can provide the best interest rate, resulting in the lowest payment compared to the other two options.

Shopping between mortgage brokers is vital

According to the Freddie Mac April 2018 Insight, shopping just one additional source for a mortgage can result in savings approaching $2,000. Shopping up to five sources can result in savings that approach $4,000.

While these numbers may seem significant, we see rates vary by as much as 0.50% between mortgage brokers. This difference presents a more significant opportunity than the Freddie Mac April Insight suggests.

Because mortgage brokers can’t represent every single wholesale option and inevitably have a differing retail margin, they can only partially act in the best interest of a customer.

Despite advances in technology and efficiency, mortgage shopping is a vital part of the mortgage process and should be done in each and every instance.

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Why margins matter in a HELOC

Ben Stucker January 3, 2019 11:57 amApril 20, 2019

Let’s take a look at what a margin is and why margins matter in a HELOC (Home Equity Line of Credit). For the purpose of this post on April 20th, 2018, we’ll be using the HELOC page found here.

HELOC margins range

What we see on the HELOC page is that margins can range quite a bit. In some cases, margins are as low as -1.25. Other margins show as high as +1.00. What does this mean when it comes to a HELOC and why is it important?

A real-world HELOC example

Let’s take a look at an analysis for a client that may be interested in obtaining a $100,000 line of credit. Here it is:

In this particular analysis, we will be comparing a “High Margin” and “Lower Margin” line of credit. In both cases, the Prime Rate is the same because it is not set by the bank. The margin, on the other hand, is set by the bank offering the line of credit. This is where you see a range of options.

The High Margin HELOC

The High Margin HELOC shows a margin of 0.50 percent. When we add this number to the prime rate, we can see that our effective interest rate is 5.25%. This interest rate will be charged until the prime rate moves up or down. Any movement in the prime rate will simply move the Interest Rate by the same amount.

In this specific case, a client borrowing $100,000 at a 5.25% rate will need to pay $437.50 each month.

Lower Margin HELOC

When we compare the lower margin line of credit, with a margin of -1.25%, we see that the same client may end up paying just $291.67 per month. This lower margin results in a savings of nearly $146.00 each month.

2018 Tax Rules may make this more important

Historically, any interest associated with a line of credit could be written off against income. Said another way, a homeowner who obtained a line of credit wasn’t “really” paying the interest rate they were given. This is because they were able to deduct the interest payments from their earned income and receive a tax refund as a result.

The new tax laws starting in 2018 have changed the laws for HELOCs. Now, there are many instances where the interest paid towards a HELOC may no longer be tax deductible. Due to this, it is more important than ever to consider savings that may be available from a HELOC with a lower margin.

HELOCs for Wealth Management Clients

Next, let’s examine a $250,000 Home Equity Line of Credit.

The same margins from above show that a savings of $364.58 is possible between a high margin HELOC and lower margin HELOC.

Cost and Shopping HELOCs

Home Equity Lines of Credit are easy to obtain and the costs to obtain them are either $0 or less than a few hundred dollars. All else equal, it is important to understand how shopping the margins between HELOCs can have a substantial impact on monthly free cash flow.

If you’d like to evaluate lines of credit in the Philadelphia area, go here.

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How does a Home Equity Line Of Credit work?

Ben Stucker December 10, 2018 10:00 amApril 20, 2019

When it comes to home finance, it pays to know your options. Homeowners looking to access cash often use a Home Equity Line of Credit (HELOC, for short). How a Home Equity Line Of Credit works is different than a traditional mortgage.

Let’s take a look at how they work and what they can do for you.

What is a HELOC?

A HELOC is a common type of second mortgage. Homeowners obtaining a HELOC often have a need for additional cash. Typical uses are debt consolidation, home remodeling or accessing cash to purchase another property.

A unique structure

HELOCs are different because they have a unique structure. For the first 10 years, the loans are in a draw period. During the draw period, homeowners can access any portion of the available cash on demand and pay only the interest on the funds in use each month.

During a draw period, homeowners can also pay back funds at any time. If more cash is needed, the funds which were recently paid back can be accessed again. In this sense, a HELOC is similar to a credit card. Different from a credit card, however, HELOCs come with relatively favorable interest rates (only slightly above traditional mortgage rates).

Adjustable rates

HELOCs also come with adjustable rates that follow the prime rate published in the Wall Street Journal. Rates can vary each month and will be impacted by the prime rate and the margin (more on margin in a moment).

When the draw period ends after 10 years, a payback period begins. During the payback period, funds can no longer be accessed from the HELOC. The outstanding balance is converted to a regularly amortizing loan spread over 20 years. Said another way, the balance is converted to a “normal” 20-year mortgage. At the start of the payback period, the interest rate is typically fixed and will remain so during the next 20 years.

Shopping a HELOC

Virtually all banks, lenders and credit unions will use the prime rate as the core component of determining the interest rate during the draw period. This is called the “index.” A bank will also set a “margin” for the draw period. Banks may offer a promotional margin for an initial period. For example, a bank may offer “Prime minus 0.50% for 6 months, then Prime plus 0.25% onwards.”

In this case, if the prime rate is currently 5%, the initial rate will be 4.5%. It is important to note that if prime increases, so will the effective interest rate. The promotional margin simply reflects a relative adjustment to the published prime rate.

Why a HELOC?

There are several reasons why you may consider a HELOC over a traditional refinance.

Maintain your great interest rate

It is no secret that mortgage interest rates have increased since their historic lows. While they may still be low, rates in the 3% range aren’t coming back anytime soon.

Homeowners looking to access additional cash may be hesitant to refinance out of their low rate – and rightfully so! The HELOC, as a second mortgage on the property, is a great option to maintain your first loan and still gain access to cash. As a second mortgage, the loan operates independently of any first mortgage on a property.

Low costs to obtain

The transaction costs associated with a HELOC are significantly lower than a traditional refinance. The costs of a HELOC are typically limited to an appraisal (around $350).

In contrast to a traditional refinance that involves an appraisal, title charges, lender charges and other fees, HELOCs come out as a far less expensive option.

It is worth noting that many banks offering HELOCs will also require a borrower to open a checking account. If it is not a requirement to obtain a HELOC, it is often a requirement to obtain the promotional rate.

Flexibility

The flexibility provided by a HELOC during the draw period makes them extremely advantageous. In addition to the flexibility of taking money on demand, the flexibility to pay it back and draw again is unique. This is in stark contrast to “closed-ended” mortgages (like your first mortgage) where payments are made and funds cannot be withdrawn.

Flexibility also comes in the form of lower monthly payments. For most HELOCs, the minimum required payment is equal to the interest accrued during the prior month. In contrast to a traditional mortgage that requires interest and principal, HELOCs provide for a significantly lower payment.

HELOCs also allow some or all of the principal balance to be paid off at any time with no penalty (unless stated otherwise in their terms). This feature allows HELOC borrowers to use them for short-term cash needs – such as cash to purchase and flip a house or buy a car.

Qualifying for a HELOC

Qualifying for a HELOC is similar to most traditional mortgage products.

A homeowner looking to obtain a HELOC will need to have good credit, documented income and some type of assets for reserves. Additionally, banks will require that the total amount borrowed against the home does not exceed 80% (or in some cases 90%) of the home value.

HELOCs can be a flexible way to obtain cash without disrupting a current first mortgage. With mortgage rates inevitably rising in the future, HELOCs will certainly maintain their place as a viable home financing product.

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3 keys to understanding purchase mortgages

Ben Stucker July 6, 2018 1:15 pmApril 20, 2019

Wondering how to buy a home and don’t know where to start? You aren’t alone in your quest to understand the home-buying process. Those looking to buy a home can quickly become overwhelmed resulting in burnout. The best way to avoid information overload is to walk before you run. Here are the 3 keys to understanding purchase mortgages.

Key 1: What is a mortgage?

A mortgage loan is a loan that is used to purchase a home. A borrower will obtain a mortgage from a bank or other lending institution in lieu of using all cash to purchase the home. Just as someone could finance the purchase of a car, would-be homebuyers can finance the purchase of a home.

When a mortgage is used by a borrower, the bank or lending institution will place a lien on the property’s title. This is not a bad thing! When mortgages are secured by a home’s title, they become less risky. Lower risk means the banks will offer more favorable interest rates when compared to personal loans that are not secured by any property. Lower interest rates will translate into lower payments, and that is a great thing!

The exact term “mortgage” refers to a specific document that is created and recorded as a public record:

A mortgage is a legal document creating a lien on a property after an agreement is reached between a borrower and lender. The mortgage becomes a public record document at the county’s office and secures a property as collateral in consideration for funds borrowed.

How does a mortgage help homebuyers?

Without mortgage loans, buying a home with cash would be the only option. Yikes!

With mortgage loans, buying a home is much more manageable. Would-be buyers will use cash to pay only a portion of the home’s purchase price. This is called the down payment. It is also typical that a buyer will pay at least a portion of the closing costs out of their cash. Take a look below for a simple example regarding a $200,000 home purchase.

In the example above, purchasing a $200,000 home results in a $160,000 mortgage and $50,000 cash required at closing. This $50,000 includes $40,000 for a down payment and $10,000 as closing costs.

Key 2: What is a debt ratio?

Debt ratios matter a great deal when qualifying for a purchase mortgage. The bank or lender requires proof that you can manage your soon-to-be housing payment. They’ll look for this proof by comparing your monthly debts to your monthly income and establishing a debt ratio. Your monthly debts will be obtained from your credit report and your monthly income will be calculated using paystubs and recent W2 statements.

Once a debt ratio is calculated, it is typically converted into a percentage. A debt ratio that is too high will either restrict the loan programs you may have access to or disqualify you completely. Yikes!

Two different debt ratio calculations?

The front-end debt ratio examines all debts except for those associated with the new housing payment. The back-end debt ratio will examine all debts and include a soon-to-be housing payment. A back-end debt ratio below 43 percent is typically low enough to have access to virtually all loan programs. Once a debt ratio exceeds 43 percent, loan program availability will be reduced drastically.

Debt Ratio Example

Assume you earn $10,000 monthly and have a car payment of $400 and student loan payments of $400 each month. Your front end ratio will be ($400+$400)/$6,400 = 12.5%. This number is far below the typical requirement of 31% for FHA loan front-end debt ratios.

Add in a new housing payment of $1,600 and the back-end debt ratio becomes ($800 + $1,600)/$6,400 = 37.5%. This ratio is approaching the limit for of 43% but still within a reasonable range to obtain access to most loan programs.

Important Tip: When calculating a debt ratio, mortgage lenders will use gross income (income before taxes).

Key 3: What goes into a mortgage payment?

A monthly mortgage payment is typically made up of four key components: principal, interest, taxes, and insurance. These four items are commonly referred to as PITI. Phonetically, PITI is pronounced “pity.”

PITI explained

Principal and interest will be calculated based on your starting loan balance and the interest rate associated with your loan. Taxes refers to the real estate taxes associated with the property. Insurance refers to the cost of the homeowners insurance required to protect the property. Homeowners insurance is a requirement when a mortgage is used to buy a property. This is because the mortgage lender needs to ensure the collateral (your home) is protected.

If you put down less than 20 percent of the purchase price when you buy a home you may need to add mortgage insurance to this number. You also may need to add monthly association dues if you purchase a condo, townhouse or any property included in an association. Since you know the basics of PITI now, these are simple to add to your monthly required payment.

What’s next?

You now have a firm understanding of mortgages, debt ratios and the components of a mortgage payment. Armed with this information, you can now continue your learning with ease – good luck!

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Reduce your mortgage payment in 2018: 3 options

Ben Stucker April 17, 2018 12:27 pmApril 24, 2019

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Taking steps to improve financial wellness is a resolution for many of us. Families want to save more and spend less. Between student loan debt and cell phone bills, it can be challenging to find opportunities to save. Homeowners, however, may have several options within reach. These are the three ways to reduce a mortgage payment in 2018.

Reduce your mortgage payment: 3 options

Want to spend less on your mortgage each month? Sure, who wouldn’t!? There are a few ways to obtain relief. Each option has important short and long-term considerations.

Re-cast your mortgage loan

Re-casting a mortgage restarts the mortgage term. Imagine for a moment that you have paid the first ten years of your 30-year mortgage. You will have just twenty years remaining. A recast would spread your remaining balance over thirty years rather than the current remaining term of twenty years. The result is a lower monthly mortgage payment.

Re-casting is different than refinancing. A re-cast can only be done by the lending institution currently servicing your mortgage loan. It may involve a pre-paid interest fee or “re-cast” fee. The charge is typically far less than the cumulative fees associated with a traditional refinance transaction. Another important difference is that a re-cast will typically not require an appraisal. For those that purchased a home at the peak of the market, this may be an important consideration.

Re-casting a mortgage loan will reset the mortgage amortization schedule. [Why this is important] Using the example from above, you would extend your mortgage payments for ten additional years. Rather than paying your slightly higher mortgage payment for twenty years, you’ll pay a lower amount for thirty years. This can make sense for many, particularly those who are likely to move in less than twenty years.

Eliminate mortgage insurance

Mortgage insurance can be required on conventional mortgages or FHA loans. Homebuyers who currently pay mortgage insurance may be able to eliminate the requirement, saving money each month.

Homeowners interested in removing mortgage insurance must meet certain criteria. Depending on the type of loan, the current balance must be equal or less than seventy-eight or eighty percent of the home value. Said another way, homeowners will need to have at least twenty percent equity in their home. Because mortgage insurance can cost $100 or more, this can be a great way to free up cash flow.

The process of eliminating mortgage insurance involves interaction with your current servicing company. By speaking with them, you’ll learn what is needed and how much it may cost. Your loan servicer may require an appraisal to confirm the current value of your home. Your loan servicer may also use the value of your home at the time of purchase. Eliminating mortgage insurance is a simple way to save money each month.

Refinance your mortgage

Reducing a mortgage payment is most commonly achieved with a rate and term refinance. Homeowners will often reduce interest rates and extend loan terms providing for substantial monthly savings. Refinance mortgages are also flexible, allowing many goals to be achieved in one transaction.

The most common way to save money with a refinance is by lowering the interest rate. All else being equal, a lower interest rate will require a lower monthly payment. Since 2007, rates have remained relatively low which means most mortgages are already in the 3.5% to 4.5% range. If your mortgage is in this range, you may not save money by reducing the interest rate alone.

Similar to a re-cast, refinancing into a longer term may also save you money each month in the short term. Similar to the example above, a loan extended from twenty years to thirty years will have a lower monthly payment with all else being equal. Extending the term of a mortgage can save you money each month even when the new interest rate may be higher than your current rate.

When refinancing a current mortgage, it is important to factor in the costs of the transaction as well as the long-term impacts. For example, those within twenty years of retirement may not benefit by obtaining a new 30-year mortgage loan. Additionally, a monthly savings of $50 or $75 may not be enough to warrant a rate and term refinance. Each mortgage scenario is different, and several variables can impact the options available.

There you have it! Three ways to reduce a mortgage payment in 2018.

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Mortgage Shopping Confidence from MortgageCS

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Gain mortgage shopping confidence

Ben Stucker November 7, 2017 10:29 amApril 13, 2019

Mortgages can seem complicated and intimidating, particularly in a world when we can “one click order” online. How can you find out what you don’t know…but really should? How can you increase your mortgage shopping confidence?

When consumers shop for mostly anything, they evaluate the item or service they’re considering based on a predetermined set of criteria. Some considerations are easy, while others are more complicated. Mortgages tend to fall into the latter category. This is typically due to the intimidation factor and the perceived complexity of the product.

Mortgage loans come with an inherent, internal language the everyday consumer rarely encounters. If you wandered around a mortgage company, you’d hear phrases such as, “Where’s that VOD?” Not surprisingly, many of these phrases would be meaningless to you.

On the other hand, when someone decides they want to go out for a coffee, the choices are a bit more familiar sounding, and the decision most likely boils down to a matter of location and price. It’s pretty simple. While loan officers might wish the mortgage process were as easy as ordering a cup of coffee, it’s typically not.

Due to the varying factors of a mortgage transaction, borrowers should compare lenders based upon quoted interest rates and responsiveness, quality and trust. Consumers should approach mortgage education by explaining their needs and what they are looking to accomplish.

In this manner, they can find out more about the lender’s mortgage process and how loans are issued.

Finding a good mortgage loan officer

There is plenty of material online about how to shop around for the best deal on a mortgage. Certainly you want the best rate at the lowest cost, but you also need to consider the reputation of the companies you’re interviewing. But perhaps the process needs to be reversed.

When you call a loan officer and ask about a rate quote, the loan officer knows there’s competition. He then provides the best available offering without considering all the details. The loan officer doesn’t have any reason to thoroughly evaluate your situation, so he falls into an all-too-familiar trap. He provides a quote to win your attention potentially resulting in a bait-and-switch.

Here’s the problem with that: The quote alone doesn’t help lift the veil off the mortgage process or account for long term needs. It won’t ensure consumers make the right loan choice. It won’t ensure that you come away from the closing with a clear understanding of what’s just happened and why. Yikes!

How can you, as a consumer, know what to ask to gain mortgage shopping confidence?

The surest path to pure mortgage nirvana is by communicating openly with the loan officers to facilitate learning early. This will be the best way to increase your mortgage shopping confidence.

Instead of considering only the interest rates, you should include a description as to what you are looking for. Here’s an example: “Here’s my situation. I want low monthly payments, but I also want to save on long-term interest. I’m retiring in about 15 years and I want to be mortgage free.”

With this information, the loan officers know to quote you a rate on a program that matches your goals. Surprisingly, that doesn’t necessarily mean a 15-year fixed rate loan.

A loan officer could suggest a 20-year loan, and set up a payment schedule that allows you to prepay just a little bit each month. This would give you the security of a lower payment if ever needed. The extra payment would be applied directly toward the loan balance and would not go to interest.

Did you even know a 20-year loan was an option? Probably not, because most information you read is about either 30- or 15-year fixed rate loans. Instead of asking for a 15-year fixed rate and the associated fees, try explaining your current situation and what you want to accomplish.

Experienced loan officers know to include this information automatically, but unfortunately most get into a rate-and-fee game, leaving borrowers confused.

Another mortgage shopping example

“I need a quote for a duplex I’m thinking of buying.”

The loan officer answers and even sends a cost estimate showing how much down payment you will need, along with a list of anticipated closing costs. You get your quote, hang up and dial another mortgage company. Doesn’t that sound like fun? NOT!

Instead, how about saying: “I’m going to buy a duplex and live in one of the units. The current rent for each unit is $1,500 per month. I want the rental income to cover my mortgage, property taxes and insurance plus a little extra cash each month.”

Now, that’s a plan. Your loan officer will explain your options and what your monthly payments will be. He’ll also help structure a prepayment plan to retire the mortgage sooner, saving you long-term interest.

The loan officer in the second scenario will explain why each option is offered and how it meets your requirements. You may not have known how much your payments would be or whether the rental income could cover your mortgage payments.

You also may not have known your interest rate would be better because you plan to live in the property rather than renting it. By the end of the conversation, you’ll know how mortgages work and how they can be crafted around your exact situation.

Mortgage Shopping Confidence

By communicating your goals along with your rate request you’ll WIN at this process we refer to as the mortgage maze. You’ll also end up comfortable with the loan program you’ve selected. Now THAT is a WIN because you’ll increase your mortgage shopping confidence!

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3 ways to keep your payment the same when rates are on the rise

Ben Stucker February 5, 2017 3:48 amFebruary 5, 2017

When it comes to mortgages and the home buying process, interest rates are almost always front and center. This is not a surprising thing, as nothing else impacts the housing market quite like a quick rise (or drop) in mortgage interest rates. Additionally, mortgage interest rates are one of the most commonly compared terms when consumers shop lenders and loan officers.

For most first time buyers, sticking to a budget is essential. So what is one to do when rates suddenly increase? Well, there are a few options – some a bit easier to consider than the others.

Look for smaller homes in the same area

If your heart is set on purchasing a home in a particular area, interest rates have recently increased AND you are on a fixed budget, there is little you can do but search for a lower priced home. If you were looking for a townhouse, this may mean you need to reduce the bedroom and bathroom count or perhaps even switch to consider condominium units. You may no longer be able to afford a home with the upgrades you hoped to include or perhaps you can no longer afford the unit with a basement or garage. In either case, some level of sacrifice will need to be made as the macro-environment of interest rates increases.

Look for homes in a less expensive area

Maybe your heart isn’t set on buying a home in a particular area – but rather the home’s amenities are front and center. If this sounds like you, then it may be easy to consider a home in a different school district, township or even over state lines (if applicable). Keep in mind that the school district can be a very important factor in reselling a property – so a bargain price today may be more difficult to sell in the future (and may appreciate at a slower rate overall).

Delay buying until next year

No real estate professional wants to see you delay the purchase of a home – and perhaps you don’t want to either. However, if you are set on a certain property type and location for your new home, this may be the most viable option provided that you can save money at a rate that will outpace the appreciation on the home and any subsequent increases in interest rates. Note: This may be a HUGE amount and ultimately be unknown until a time in the future.

Keep in mind there are some significant risks with delaying the purchase of a home. First, the interest rate environment is largely unpredictable and rates could increase further – actually making the home less affordable next year. Second, home prices could increase which translates to you spending more over the life of your loan, and missing out on a year’s worth of home value appreciation. Third, there is no way to know what the home inventory may look like. If there are homes you would consider purchasing today, there is no way to guarantee the inventory will be available next year (Just ask anyone that wanted to buy a house in 2016 and waited until 2017 when inventories were down 40%!).