Home Buyers Are Finding Ways To Take The Sting Out Of Rising Mortgage Rates.
Key Points
- The average interest rate on a 30-year fixed mortgage is 7.04%, up from 3.33% at the start of the year.
- While home prices have eased over the last couple of months, they are still up 13.5% from a year ago.
- This combination has created an affordability challenge for homebuyers.
Even with signs that the housing market is cooling down, homebuyers are still feeling the sting of elevated prices and higher interest rates.
Mortgage rates are at their highest level in more than a decade, but home buyers are fighting back. More and more borrowers are paying fees to lower their interest rates. According to lenders and real estate agents, people can do this by making higher down payments in order to lower the amount they have to finance. Some people are even buying homes under construction and choosing to lock in today’s rates rather than risk even higher ones later. Also, more home buyers are considering home loans that carry lower rates in their early years.
“I think the major problem is payment shock,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit down with clients and the rate is in the 6s, their payment is outrageous sometimes.”
The difference that interest rates make can be substantial. For a $300,000 mortgage at 6.5% over 30 years, the monthly principal and interest payments would be $1,896. That same loan at 3% would produce a payment of $1,264 (a $632 savings). Other charges, such as property taxes or mortgage insurance, would be added to those amounts.
However, there are ways to reduce the cost of buying a house. While there’s no one-size-fits-all approach, you can evaluate the various options available and consider whether any of them make sense for your situation.
Here are some options to relieve homebuyers’ payment shock.
An ARM Could Be A Short-Term Answer
An adjustable-rate mortgage (ARM) may be worth considering. With an ARM, the initial rate is lower compared to a traditional fixed-rate mortgage.
That rate is fixed for a set amount of time — say, 7 years — and then it adjusts up, down, or remains the same, depending on where interest rates are at the time.
There’s a limit to how much a rate can change. However, experts recommend ensuring you’re able to afford the maximum rate if faced with it later on. As illustrated above, a few percentage points can significantly affect the monthly payment.
Keep in mind that you may be able to refinance your mortgage at any point before the rate adjusts.
If you anticipate moving before the initial rate period expires, an ARM may make sense. However, since it’s impossible to predict future economic conditions, it’s smart to consider the possibility that you won’t be able to move or sell.
Additionally, the savings may not be worth the uncertainty if the ARM rate isn’t much lower than a fixed rate. Rinaldi said that while some lenders aren’t offering much of a discounted rate, he’s finding some that are at about one percentage point or lower.
Read More: What Type of Mortgage Program Is Best for You?
15-Year Mortgages Reduce What You Pay In Interest
While the typical mortgage is for 30 years, a shorter loan with a more favorable rate may be attractive. According to Bankrate, the average rate for a 15-year loan is 6.43% as of Friday, October 14. Additionally, you save a lot in interest over the life of the loan, and you build equity in the house at a faster pace.
For example, a 30-year, $300,000 mortgage with a fixed 6.5% rate would mean paying $382,786 in interest over the life of the loan. On the other hand, a 15-year mortgage at the same rate would translate into paying $170,438 in interest during the loan.
“It’s not just the rate difference, but the equity buildup, too,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio.
At the same time, he said, it may not be the best route if the higher payment squeezes your budget too much.
First-Time Homebuyer Programs Can Help With Costs
If you’re a first-time homebuyer with limited means, you could qualify for one of the federal programs available that provide assistance to homebuyers by offering a lower down payment and reduced closing costs. Additionally, state and local governments (city or county) often offer grants or no-interest loans to help buyers cover their down payment and closing costs.
Rent-To-Own Works In Some Cases
Sometimes, a potential homebuyer might not qualify immediately for a mortgage due to credit score issues or insufficient work history. Additionally, they might need more time to save for a down payment but still want to buy a house.
In cases like this, it makes sense to consider a lease or rent-to-own contract. These contracts arrange for a portion of the monthly rent to go into an escrow account until the date of purchase a couple or few years down the road, at which point the escrowed amount goes toward closing costs or a down payment. If the buyer walks away or can’t meet the contractual obligation, the money is forfeited.
If you’re considering going this route, it’s essential that you do the due diligence and ensure you understand the contract terms — including the type of mortgage the property is eligible for and how the purchase price will be set.
Read More: Are Mortgage Rates High? A Historical Comparison
Save By Buying Points And Trimming Closing Costs
You may be able to negotiate closing costs, such as the fees you pay for various aspects of the home-buying process, or by using a lower-cost title company. Moreover, the seller might be willing to pay some of your costs, depending on the competing offers.
You may also be able to buy extra “points” — one point is worth 1% of the loan amount — to get a lower interest rate.
However, Rinaldi cautions that it may not be worth it because it can take years to break even when you go this route.
“You don’t want to pay extra origination charges because if you refinance, that’s lost money,” Rinaldi says.
Bottom Line
Rising mortgage rates aren’t good news for home buyers. But unfortunately, today’s higher rates likely aren’t going anywhere. However, that doesn’t mean it’s time to panic or rush prematurely into any choice. So rather than giving up, borrowers need to adapt their strategies to the new mortgage rate market.
Luckily, you can do plenty to fight the market and lower your rate. Keep your finances in order, know your loan options, and don’t be afraid to compare lenders and make them compete for your business.
Lowering your rate by even just a fraction of a percent can lead to huge savings. So any additional work you put in to find a lower rate should be well worth the effort.
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