September 1, 2004
What to Do As Interest Rates Rise
When Karim Webb goes to close his next real estate deal, he’ll try to lock in a mortgage rate as early as possible. That’s because in the current market, if he allows 30 days to go by on a deal, he could end up paying more. The 30-year-old mortgage banker with United International Mortgage Bank in Los Angeles owns seven residential properties, including his home, and he’s contemplating buying more. Webb is concentrating on markets outside of Los Angeles, where prices are still affordable. “I think the Los Angeles [and] San Francisco area properties that have doubled in value over the last three years are going to decrease in value at a greater rate than [properties in other] markets where average home prices aren’t as high,” he says.
Webb’s father, Reggie, a 56-year-old McDonald’s franchisee who owns 11 restaurants in Southern California with another soon to open, is planning to build an addition to his home in Claremont, California. “The cost of adding on is less than the cost of what homes are selling for per square foot,” he reasons. He plans to pay for the construction by refinancing his 30-year fixed-rate mortgage at an interest rate of 5.75%, almost two percentage points lower than the rate he got five years earlier when he bought his home. He’ll save thousands of dollars in interest payments.
Since hearing news of the economic recovery -increased gross domestic product growth, lower unemployment rates, and more jobs -accompanied by higher prices, inflation, and the expected rise of the federal government’s short-term interest rate, both men are doing what they can now to protect their real estate and business holdings. With the economy expected to remain volatile in the short term, here are some things consumers and investors can do to help ease the pinch of rising interest rates:
Stay fixed in real estate. The average 30-year fixed-rate mortgage remains well below the low watermark for the 1990s, which was 6.83%, says Keith Gumbinger, vice president of HSH Associates, publisher of mortgage information. Still, those in the real estate market say rates are beginning to feel upward pressure.
Reggie took out seven loans to acquire or renovate his McDonald’s franchises. Most of the loans have a life of seven years and interest rate caps that range from 2.5% to 4.5%. Two of the loans are fixed; the other five have floating or adjustable rates that can be fixed once during the life of the loan. Reggie says he tries to keep a blend of fixed- and floating-rate loans so he can benefit from market conditions on at least a portion of the debt he carries: “If I see interest rates beginning to rise dramatically, and it looks to me like they will continue to rise, I can fix some loans at whatever the fixed rate is on that date.” Reggie intends to obtain a fixed-rate loan to acquire his twelfth franchise. “That way, I’ll lock in my rate [at near historic lows] and it won’t go up over