According to mortgage research firm HSH Associates' latest survey, mortgage rates have risen about half a percentage point over the past five weeks. On May 23, the average conforming 30-year fixed-rate loan was 6.02 percent. By last week, that figure had jumped to 6.55 percent. On May 23, the average jumbo loan sat at 7.12 percent. By last week, that figure had risen to 7.65 percent.The average 5/1 adjustable rate mortgages (ARM) — a mixture of conforming and jumbo — also jumped half a percentage point. So what's going on? At the moment, fear of inflation is driving this increase. Right now, technically, we are not in a recession, for the economy is still showing signs of life. With that as a backdrop, the Federal Reserve announced it was no longer likely to cut interest rates. In fact, the Federal Reserve may start raising rates sooner, rather than later, thanks to the fear that inflation will get out of control. With that in mind, what are Americans to do? In these uncertain times, we've compiled advice for buyers, sellers and those who hold adjustable rate mortgages.If you’re buying
- A down payment is a must. As a nation, we got used to zero-money-down loans. Today, the minimum for a Federal Housing Authority (FHA) loan is 3 percent. You'll do better in most marketplaces with 5 to 10 percent. Most challenged housing markets are asking for somewhere in the neighborhood of 10 to 20 percent down. In this case, more is better.
- A credit score over 720 is what you'll need to get the best rates in the marketplace. You can find financing with a lower score, but you'll pay more. Right now, according to myfico.com, on a 30-year fixed-rate loan, the following score nets you the following rate, which translates into the corresponding monthly payment on a $300,000 loan:
- Be sure to document your income and assets. The days of "liar loans" are long gone. Today, you must prove that you are the borrower you say you are. During the days of free-flowing money, lenders would allow the total debt you were carrying to creep up to 55 percent of your income. Today, that number is 43 percent, which makes the case that you should get preapproved for your loan, so that you know what you can really afford.
- You must force yourself to shop around. Last week, the low quote on a 30-year conforming loan from HSH.com was 5.875 percent, while the high was 9.5 percent. If you want to get the best deal possible, you need to shop around. Traditional mortgage lenders and bank-owned mortgage companies are going to be the best choice for anyone who wants a traditional conforming loan. But, if you're still looking for something special — to not document your income, for example — you'll need to deal with a lender who keeps the loan in its portfolio. Look at credit unions, small and mid-size banks, as well as thrifts, and mortgage brokers (but only mortgage brokers who have been through these ups and downs before). You will need a seasoned veteran. Finally, if you're buying, and you're one of these nonconforming cases, have a second deal ready to go in your back pocket in case the first one falls apart.
If you’re a seller
If you're a true seller, be ready to adjust your expectations. Three years ago, this proposition was reversed; the market came to you. Today, you have to be realistic about what your house will sell for. By all means, get out of your first property before you agree to buy another; bridge financing is tough to come by.
If you have an ARMChances are that if you have an ARM that either reset this spring or is just resetting now, you're looking at the rate going down, rather than up. Now is not the best time to look at refinancing out of your ARM, because you'll pay more on the fixed-rate loan than you are on your current loan. But don't get complacent; your rate may have gone down this year, but chances are it will go up next year. So if this year's monthly payment is less than last year's, take the difference and drop it into a savings account — that way you'll be able to handle any bad news that comes in 2009.
If you're feeling nervous, don't fret; there's a rainbow at the end of this message. Home prices have fallen — in some places to where they were in 2003 and 2004 — which offsets the gains in mortgage rates. You may be able to find such a good deal in your area that your out-of-pocket cost would be less than it would had you bought a more expensive home with a cheaper loan. The key is to lock into that good location now, and wait for a chance to refinance when the business cycle turns.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .