Mortgage interest rates are scary these days. Here are 3 ways to reduce them
It’s a tough time to buy a house. Interest rates have increased by more than 100% over the past year. If you already own a home and have no reason to move, now’s probably not the time to refinance – you’re definitely better off sticking with the mortgage you already have.
But what if you or your employees have to move and you have to apply for a mortgage because you have no other choice? Be prepared to be patient. Mortgage professionals report that interest rates and loan requirements change so quickly that you might qualify for a loan one day and not qualify the next. And if you get a loan, will you be able to make your mortgage payment every month? Can you do anything to make these payments more affordable?
The answer is yes, but with some potential downsides. You may only be able to lower your interest rate temporarily. You may have to ask the seller to pay your lower rate, which they may not be willing to do. Worse still, you could put yourself at financial risk if your payments reach a level you can’t afford and house prices drop, meaning you won’t be able to sell the house for a high enough price. to pay off your mortgage.
Here’s a look at what some lenders are offering to ease the pain of higher interest rates and whether it’s a good idea to accept them.
1. Pay points.
Paying points is not a new idea, although it fell out of favor in the days of low interest rates. As interest rates edge closer to 7% and possibly beyond, it may be time to revisit the dots. Points are upfront fees you pay to the bank to lower your interest rate. Typically, one point costs 1% of your total mortgage amount and reduces your interest rate by 1%. (Points can also be split.) Points are usually part of the mortgage offer made by a lender.
Why you might want to pay points: Points are the only way to lower your interest rate permanently rather than temporarily. You need your monthly mortgage payments to be sustainable, and if you can afford to pay a lump sum up front to achieve this, it might be worth it.
Why you couldn’t: Paying points may not make sense depending on the length of your mortgage. If you plan to pay it off as soon as your old house sells, for example, the points will likely cost more than they save you. The same is probably true if you’re only staying in your new home for a few years. In these cases, you might be better off using the money you spent on points to make a bigger down payment, reduce your overall debt, or make improvements that increase the value of the home.
Smart move: Use a mortgage calculator to figure out what your monthly payments would be with and without points. Then figure out how many months it would take for your total savings to equal what you spent in points. Ask yourself how likely you are to pay off the mortgage for that long. Your answer should tell you whether the dots are a good idea or not.
2. Ask the seller for a temporary interest rate buyout.
Temporary interest rate redemptions are, in effect, a temporary version of points, where someone pays a lump sum up front. This money goes into escrow and is used to pay off a portion of the mortgage each month, reducing the interest rate by a percentage point or two for the first year or two. You can pay this money upfront yourself, but depending on the circumstances, the seller of the house or their realtor may pay it to close the deal. Or the lender might even pay it.
Why you might want a temporary interest rate buyout: Since the money that goes into escrow is equal to the money you’ll save by lowering your interest rate, it doesn’t make sense that most buyers pay for the purchase themselves. On the other hand, if the seller, agent or lender is willing to pay for the buyout, it essentially amounts to found money. And having lower mortgage payments for the first year or two could be handy if you know you’ll be spending a lot of money on upgrades or repairs when you first move in.
Why you might not: Humans have a bad habit of pushing problems away and believing we’ll be able to solve them in the future, especially when it comes to money. This is how people get into trouble with credit card debt, for example. If you can’t afford those higher mortgage payments today, chances are you won’t be able to in a year from now either.
Smart move: Sellers and agents usually offer a temporary buyout when they are having trouble selling a home. So it makes sense to dig a little deeper and find out why. Is the house too expensive? Is there an issue you may have overlooked?
3. Get an adjustable rate mortgage, or ARM.
Most people switched to fixed rate mortgages when rates were low, but ARMs are becoming a bit more popular now that interest rates are higher.
Why you might want an ARM: ARM starting interest rates are generally lower than fixed rate interest rates. And some lenders will commit to that initial rate for a long time, like five to ten years. If so, an ARM may make sense, especially if you’re not planning on staying home for very long.
Why you couldn’t: There’s a head-I-win-tail-you-lose aspect to ARMs. If interest rates go up, your payments will go up. If interest rates go down, the ARM won’t matter because you’ll refinance at a fixed rate as soon as you can. So if you’re considering an ARM, you should probably consider it a very temporary arrangement. Keep in mind that this comes with a lot of risk.
Smart move: If you’re considering an ARM, try to get the longest possible warranty for that lower initial rate. Next, keep a close eye on financial news and interest rates announced by your local lenders. Plan to refinance at an acceptable fixed rate as soon as possible.
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