While interest rates have moved off the historic lows hit in 2003, they have moved in a fairly tight range over the past few years. Mortgage rates may still be affordable when put in the context of the last twenty years—but they are still higher than what you may have expected.

Purchasing a home after a significant rise in rates can call for a variety of different strategies which may prove beneficial in the long run. Consider the following—

• Don’t try to beat the market.
  The future of interest rates can never be predicted—so do not act based upon the idea that tomorrow may be better or worse. You should act based upon whether today’s market makes sense for you. Consider your home purchase much the same as shares of stock that you hold. If you purchase a stock for $100 per share—and the stock is now $125 per share—do you sell now? If you hold, the shares may decrease. If you sell, the shares may increase. The problem is, you don’t know what may happen—so your decision must be made based upon the value of the stock today.

• Make clear your reasons for purchasing.
  It is the purchase itself which is the most important part of the transaction—not the conditions which surround the purchase. For example, if you are trading down because your children are now grown and you are looking for a place to retire the interest rate environment may affect you differently than someone purchasing a start-up home which will be owned for less than five years.

• Mortgages don't last for thirty years.
  If you look at the rise in rates and how they may affect you over a thirty year period, you may make a decision which is based upon faulty information. The average mortgage lasts less than seven years. In the past few years, the average may be closer to five years because of very low mortgage rates. If a rise in rates causes your payment to rise by $100 monthly—the view may be significant over 30 years, but very manageable for a shorter time-frame.

• Pay less points, not more.
  After a rise in rates, the typical reaction is to pay more points (one point is equal to one percent of the loan amount) so that you can buy the interest rate down closer to where rates were a few months ago. This is a mistake. You are much more likely to refinance when rates move back down if you purchase when rates are moving up. If you purchase and then refinance quickly, the points paid will be wasted. In addition, buying the rate down now will make the spread narrower between your mortgage rate and the lower rates of the future. In other words, the refinance will most likely make no sense economically—and you will miss out on even lower rates in the future!

• Try an adjustable.
  Rising rates now make refinances more likely in the future. Therefore, if you opt for a thirty year fixed rate mortgage you will be paying for protection you are not likely to use. Try an adjustable which fixes the rate for the first three to ten years of the mortgage. Your savings on a monthly basis may actually pay for the costs of a refinance.

• Remember the tax deduction.
  Any rise in rates will be partially mitigated by the tax deductibility of mortgage interest. If your payment rises by $100 monthly and you are in a 35% tax bracket—the effective payment increase is $67.

The classic advice given to those purchasing in this type of market is to increase your down payment, purchase a smaller home or pay more points. If you take a longer term view of your home purchase, you will not arrive at the same conclusions. Rising rates require a short-term view (adjustables) and a long term view (refinances). Use them both!…