Interest rates

Advisors: How to Navigate Mortgages as Interest Rates Rise

For consumers looking to buy or refinance homes, rising mortgage rates are hard to watch. The average 30-year loan rose to 4.4% from 3.1% this year, while the 15-year rate rose to 3.6% from 2.3%. With the Federal Reserve in inflation-fighting mode, experts say the 30-year rate could hit 5% by the end of the year.

Admittedly, rates are still quite subdued by historical standards: the average 30-year loan rate was in double digits as recently as 1990. But this year’s sharp rise in the cost of borrowing for homes many customers to turn to their financial situation. advisors to guide you. So for this week’s Big Q, we asked advisors: With interest rates rising, how do you advise clients on mortgages and other loans?

Parris Hall

Courtesy of TD Wealth Management

Parris Hall, Head of Wealth Management Banking Solutions at TD Wealth Management: The advice we give to clients is, first of all, let’s make sure the acquisition, whether it’s the house or, say, the boat, is in line with your goal-based plan. Second, with stocks as low as they are and rates moving as quickly as they are, the strategic leverage available to wealthy clients in title loans gives them a wonderful opportunity to act quickly. They may be in post position for these purchases, to lead to an immediate close with no contingencies required. And they have the option to replace that with a permanent cash refinance at the end.

We had the lowest climate I have seen in my life; it only goes up from here. So the idea of ​​locking in a fixed rate for the long term, whether you have a variable rate loan and you’re looking to refinance or you’re looking to buy, is one of the big things that I would encourage clients to make. Even today you can still find 3.5% [rates]. And the Fed telegraphed that it was going to raise rates by 150 basis points. When you think about the average size of a wealth planning client’s mortgage – somewhere between $1 million and $2 million – that’s significant interest over the life of the loan.

Erin Wood

Courtesy of The Carson Group

Erin Wood, Senior Vice President of Financial Planning and Advanced Solutions, Carson Group: When it comes to mortgages, one thing I see is that people are unprepared when they go to the bank, and the interest rate changes so quickly. If you arrive and you don’t have your tax forms, you don’t have your employment information, you have bad information on your credit report, all of these things are killing you in an environment where rates could increase overnight next day. [Advisors] need to help clients get ready with all the right documents and make sure their credit reports are clean and clear.

Most people don’t own their homes for 30 years; the average tenure of those who sold at the end of last year was actually 6.3 years. People should consider 15-year mortgages or one of the five-year variable rate mortgages [both of which may have lower rates than 30-year mortgages]. If you know someone will only be staying in a home for three, four or five years, these are some of the things clients and their advisors should discuss. I would also watch my variable interest rate [credit cards] at this point and I’m looking for places where I can put them in something that’s fixed and will stay low. If you can get a 7% or 8% home equity line of credit, that’s less than a 20% credit card. It also consolidates these minimum payments into one payment so your dollars have a bigger impact.

Malcolm Makin

Malcolm MakinPresident and CEO, Professional Planning Group: I think most advisors, myself included, have tried to encourage people to refinance, take advantage of lower interest rates and go for low fixed rate mortgages. I just read that last week the average mortgage rate went up more than 30 basis points. It’s amazing, and it’s not going to stop. When I bought my first house, I had an 11% mortgage. It would be very easy for that to happen again.

Randy Carver

Photograph by Peter Larson

Randy CarverPresident and CEO, Carver Financial Services: If someone has an adjustable rate mortgage, we recommend that customers sign up today before rates go up. In most cases, we recommend 15 or 30 year fixed rate mortgages. The only exception is if someone is not going to stay in a house forever, we find that the best rates today are for 15 year variable rate mortgages, usually 15/1 mortgages. The rate is locked for 15 years, then it can go up once [per year]. But there is a real sweet spot there right now.

We’ve had a number of clients using equity-based lines of credit, where they borrow against the portfolio. This rate is variable. As a rule, it is linked to the Libor [the London interbank offered rate] or one of the other tariffs. And so, for people who have larger outstanding loans at this stage, we are looking for alternative fixed rate financing. If people currently have higher interest rate debt, or are planning to buy something like a vehicle, plane or yacht, again using a fixed rate loan, the rates are still incredibly low right now. Fixed-rate 15- or 30-year mortgages are fairly inexpensive, with rates below 4% for 15-years and below 4.5% for 30-years. You can get even lower rates on jumbo ARM mortgages, where a 15/1 loan with a 30-year amortization can be less than 3.5%. Even with the recent increase, the rates are still relatively cheap.

Scott Tiras

Scott TirasChairman, Tiras Wealth Management: The fact that the Fed is raising interest rates is front and center. In anticipation of some of these hikes, we have seen fixed mortgage rates rise already by around 2% even though the Fed has only raised rates by 0.25%. For our clients who have put off refinancing their home, we tell them in most cases that it might be too late unless they are at least 1% to 2% above the current market rate. Some have adjustable rate products, and refinancing them into a fixed product might be justified depending on their situation. Others have home equity lines of credit, which can float with the prime rate. Many must be prepared to build additional payments into their budget or seek other sources of funding. Ultimately, we tell all of our clients to look at the different loan products they have in circulation and let them know it’s time to have a chat now.

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

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