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- The average interest rate on a 30-year fixed mortgage is<\/span> 7.04%<\/b>, up from<\/span> 3.33% <\/b>at the <\/span>start <\/b>of the year.<\/span><\/li>\n
- While home prices have eased over the last couple of months, they are still up <\/span>13.5%<\/b> from<\/span> a year<\/b> ago.<\/span><\/li>\n
- This combination has created an affordability challenge for homebuyers.<\/span><\/li>\n<\/ul>\n
Even with signs that the housing market is cooling down, homebuyers are still feeling the sting of elevated prices and higher interest rates.<\/span><\/p>\n
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\u2019s rates rather than risk even higher ones later. Also, more home buyers are considering home loans that carry lower rates in their early years.\u00a0<\/span><\/p>\n
\u201cI think the major problem is payment shock,\u201d said <\/span>Stephen Rinaldi<\/b>, president and founder of <\/span>Rinaldi Group<\/span><\/a>, a mortgage broker based near Philadelphia. \u201cWhen I sit down with clients and the rate is in the <\/span>6s<\/b>, their payment is outrageous sometimes.\u201d<\/span><\/p>\n
The difference that <\/span>interest rates<\/span><\/a> make can be substantial. For a <\/span>$300,000<\/b> mortgage at <\/span>6.5%<\/b> over <\/span>30 <\/b>years, the monthly principal and interest payments would be <\/span>$1,896<\/b>. That same loan at <\/span>3%<\/b> would produce a payment of <\/span>$1,264<\/b> (a <\/span>$632 <\/b>savings). Other charges, such as property taxes or mortgage insurance, would be added to those amounts.<\/span><\/p>\n
However, there are ways to reduce the cost of buying a house. While there\u2019s no one-size-fits-all approach, you can evaluate the various options available and consider whether any of them make sense for your situation.<\/span><\/p>\n
Here are some options to relieve homebuyers\u2019 payment shock.<\/span><\/p>\n
An ARM Could Be A Short-Term Answer<\/b><\/h2>\n
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<\/p>\nAn <\/span>adjustable-rate mortgage<\/span><\/a> (ARM) may be worth considering. With an ARM, the initial rate is lower compared to a traditional fixed-rate mortgage.<\/span><\/p>\n
That rate is fixed for a set amount of time \u2014 say, <\/span>7 years<\/b> \u2014 and then it adjusts up, down, or remains the same, depending on where interest rates are at the time.<\/span><\/p>\n
There\u2019s a limit to how much a rate can change. However, experts recommend ensuring you\u2019re 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.<\/span><\/p>\n
Keep in mind that you may be able to refinance your mortgage at any point before the rate adjusts.<\/span><\/p>\n
If you anticipate moving before the initial rate period expires, an ARM may make sense. However, since it\u2019s impossible to predict future economic conditions, it\u2019s smart to consider the possibility that you won\u2019t be able to move or sell.<\/span><\/p>\n
Additionally, the savings may not be worth the uncertainty if the ARM rate isn\u2019t much lower than a <\/span>fixed rate<\/span><\/a>. <\/span>Rinaldi <\/b>said that while some lenders aren\u2019t offering much of a discounted rate, he\u2019s finding some that are at about one percentage point or lower.<\/span><\/p>\n
Read More: <\/b>What Type of Mortgage Program Is Best for You?<\/b><\/a><\/p>\n
15-Year Mortgages Reduce What You Pay In Interest<\/b><\/h2>\n
While the typical mortgage is for <\/span>30 years<\/b>, a shorter loan with a more favorable rate may be attractive. According to <\/span>Bankrate<\/span><\/a>, the average rate for a <\/span>15-year<\/b> loan is <\/span>6.43%<\/b> as of <\/span>Friday, October 14<\/b>. Additionally, you save a lot in interest over the life of the loan, and you build equity in the house at a faster pace.<\/span><\/p>\n
For example, a <\/span>30-year<\/b>, <\/span>$300,000 <\/b>mortgage with a fixed <\/span>6.5%<\/b> rate <\/b>would mean paying <\/span>$382,786 <\/b>in interest over the life of the loan. On the other hand, a <\/span>15-year<\/b> mortgage at the same rate would translate into paying <\/span>$170,438 <\/b>in interest during the loan.<\/span><\/p>\n
\u201cIt\u2019s not just the rate difference, but the equity buildup, too,\u201d said certified financial planner <\/span>David Demming<\/b>, president of <\/span>Demming Financial Services<\/span><\/a> in Aurora, Ohio.<\/span><\/p>\n
At the same time, he said, it may not be the best route if the higher payment squeezes your budget too much.<\/span><\/p>\n
First-Time Homebuyer Programs Can Help With Costs<\/b><\/h2>\n
If you\u2019re a first-time homebuyer with limited means, you could qualify for one of the <\/span>federal programs<\/span><\/a> available that provide assistance to homebuyers by offering a lower <\/span>down payment<\/span><\/a> and reduced <\/span>closing costs<\/span><\/a>. 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.<\/span><\/p>\n
Rent-To-Own Works In Some Cases<\/b><\/h2>\n
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.<\/span><\/p>\n
In cases like this, it makes sense to consider a <\/span>lease<\/span><\/a> or <\/span>rent-to-own contract<\/span><\/a>. 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\u2019t meet the contractual obligation, the money is forfeited.<\/span><\/p>\n
If you\u2019re considering going this route, it\u2019s essential that you do the due diligence and ensure you understand the contract terms \u2014 including the type of mortgage the property is eligible for and how the purchase price will be set.<\/span><\/p>\n
- While home prices have eased over the last couple of months, they are still up <\/span>13.5%<\/b> from<\/span> a year<\/b> ago.<\/span><\/li>\n