With interest rates and home prices at their highest levels in recent years, many potential homebuyers are running into the double wall of financial burden when finding and paying for a home they can afford.
However, homebuyers have options that can help reduce the impact on their monthly mortgage payments in particular.
Buying points, also known as “buying rates,” is a common way for homebuyers who have some additional cash on hand to reduce their monthly payments. Even in a low interest rate environment, many borrowers may buy points to reduce the total amount of interest paid over the entire term of the loan.
The mechanism is as follows.
If you have extra cash after closing costs and a mortgage down payment, buying points is an easy way to lower your interest rate. Each point you buy costs 1% of your mortgage, so buying one point with a $ 300,000 mortgage costs $ 3,000.
Normally, the interest rate on a mortgage will drop by about 0.25% for each point purchased, so if the interest rate is 5%, it will be 4.75% for the entire term of the loan.
A $ 3,000 upfront investment to buy one point at closing reduces interest rates, monthly payments, and ultimately the overall cost of the loan.
Get a Floating Rate Mortgage (ARM)
After the 2008 financial crisis, the reputation of floating rate mortgages as a viable means of mortgages was hit hard.
However, ARM is making a comeback in today’s high-interest, high-cost housing market because it offers great value to the right borrowers and can break down barriers to entry.
ARM usually starts at a lower interest rate than a fixed rate mortgage and can be particularly beneficial to the borrower if the interest rate is high. High interest rates also cut the amount that homebuyers can afford to borrow, thus losing purchasing power.
Floating rate mortgages regain some of their power by offering lower introduction rates that remain the same for a given period of time (usually 3 to 10 years) before interest rates change. Useful for.
This is a first-time homebuyer planning an upgrade before the introduction period expires, or a homeowner who expects to increase household income or pay off other debt such as student loans during this period. Especially useful for those who are.
When using the ARM route, pay attention to the interest rate during the introduction period, and if the fixed interest rate falls below the ARM rate, consider refinancing to fix the fixed interest rate and the period.
However, ARM is not suitable for everyone. If you plan to stay in a new home for the next 10 years or more, ARM carries a great deal of risk at the end of the implementation period, as interest rates may rise in line with the current interest rate environment at that time.
It’s also important to remember that just because ARM can get more purchasing power at higher prices doesn’t mean it needs to be done. You may need to adjust your expectations for the amount of homes you can really afford and stick to fixed rate mortgages to stay within your short-term and long-term budgets.
Jeffrey M. Ruben, President of WSFS Mortgage, joined WSFS through the acquisition of Array Financial, a full-service mortgage banking organization, and Arrow Land Transfer in August 2013. Ruben founded Array and Arrow in 2005 and was formerly a financial and legal institution.
How to Mitigate the Impact of Higher Mortgage Interest Rates [Column]
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