Q: We're trying to save a bigger down payment in hopes of getting a better mortgage rate; but now I'm worried that if the fiscal cliff kicks in, it might send mortgage rates back up next year. Do you think we should pull the trigger sooner rather than later?
A: A larger down payment might help you qualify for a lower mortgage rate, and it certainly can help you avoid the additional expense of mortgage insurance on an FHA loan, not to mention the additional interest you would pay by financing a larger amount. Ordinarily, then, bigger is better when it comes to a down payment. However, as you point out, with the fiscal cliff looming, these are not ordinary times. Here are three housing-related consequences if no budget deal is reached:
- Mortgage rates should remain low. Current mortgage rates are so low that it's tough to predict them falling further, but a severely crippled economy would certainly help mortgage rates sustain their current record-low levels.
- Mortgage availability would dry up. People are already complaining about how tight lending standards are; but if the economy lapses back into recession, it could become tougher than ever to get a mortgage loan (or any kind of loan, for that matter).
- Housing prices could fall. The fragile recovery in housing would probably be shattered by a new recession.
Your decision may come down to timing, but it need not be as tight as you may think. Despite the January 1, 2013 deadline, it will take a while for the fiscal cliff measures to have a real impact on the economy. So, if you think you are just another month or two away from reaching your down payment target, you can probably afford to wait. If you are looking at an extended period of additional savings, the big consideration is that, fiscal cliff or no fiscal cliff, you now have the lowest mortgage rates on record. Don't count on that opportunity waiting around forever.