With mortgage interest rates on the rise, it’s time to get creative when it comes to getting the best possible rate on your home loan. Here are 3 options to consider when looking to lower your monthly loan payment.
Buy down your interest rate.
Did you know that higher loan fees could get you a lower interest rate? There is a direct relationship between loan fees and interest, and by paying higher fees through purchasing discount points, you can effectively buy down your interest rate. Though rates vary, on average each point you buy will lower your interest rate by .25 percent. For example, on a 30-year fixed loan of $400,000 at 5%, you would pay $4,000 (or 1 percent of your loan) for 1 point to buy down your rate to 4.75%.
To know whether this option makes sense for you and how many points you’d want to purchase, you’ll need to evaluate your potential monthly savings and your breakeven timeline.
Using the example of a $400,000 30-year fixed loan, a lender would charge you 4 points to lower your rate from 5% to 4%. Since each point costs 1% of the loan, this would cost you $16,000 in additional closing costs but would lower your monthly payment by over $237.
To determine how long it will take you to recoup the $16,000 and benefit from the lowered interest rate, you’ll need to divide the cost of points by your monthly savings. In this example, $16,000 / $237.63 = 67.33, so 67 months is your break even point.
With this example, you would need to stay in the home for more than 5 years for the buydown to make sense. If you do plan to stay in the home beyond that timeframe, it can mean significant long-term savings.
There are different types of buydowns. The first is the 2-1 buydown, which offers you a lower interest rate for the first two years. The second is referred to as the 3-2-1, which is less common but can offer you even lower interest for the first year. Each option has its pros and cons, so if you’re interested in exploring the buydown possibilities, ask your lender to provide you with options so you can decide which is the most favorable for you.
Generally, the buydown option is best suited for someone who plans to stay in their home for a while to recoup their extra closing costs and reap the benefit of the lower interest rate. If you’re only planning on staying in the home for 5 years or less, it may not be the best option for you.
Look for a home with an assumable loan.
An assumable mortgage is exactly as it sounds. If a loan is assumable, it means that the buyer can assume the seller’s mortgage rather than having to take out a new loan. This is especially appealing if the existing loan carries a much lower interest rate than the current market rate.
The assumable loan isn’t a widespread option because it generally isn’t available on conventional loans. However, mortgage loans that are backed by the government are typically assumable. This includes FHA (Federal Housing Authority), USDA (US Department of Agriculture) and VA (Veterans Affairs) loans.
What’s the catch? The buyer must still meet the necessary guidelines to qualify for the loan and have enough cash to cover the difference in the principal and sale price. For example, if the market value of the home is $400,000 and the seller owes $250,000, the buyer will have to pay the difference of $150,000 in cash at closing.
-Potential to lock in a significantly lower interest rate.
-Fewer closing costs
-Appraisal not necessary
-Higher down payment
-Buyers are limited to the original loan terms and conditions.
This is a great opportunity to lock in a lower interest rate if the seller has a loan that is assumable and you have the cash for a larger down payment.
Consider an Adjustable Rate Mortgage (ARM).
Adjustable rate mortgages have risen in popularity in 2022 as fixed rates have continued to rise. With an adjustable rate mortgage (ARM), you lock in a lower interest rate for a period of time, and then that rate can adjust once per year for the remainder of your loan.
Throughout 2022, adjustable rates have stayed at least 1% below fixed mortgage rates, making them an appealing choice for many in the current market. There are multiple types of ARMs, including the 5/1, 7/1, and 10/1. The first number is the amount of years the lower interest rate is locked in before increasing. Depending on which option you choose, you could save a significant amount on payments for up to the first 10 years of your loan, allowing you to afford a more expensive home for the same monthly payment you would pay on a smaller fixed rate mortgage.
Prior to 2008, adjustable rate mortgages were more risky and didn’t have the same protections they do now. Thankfully for buyers in 2022, there are rate caps that protect the borrower from significant rate spikes. You’ll still be exposed to higher rates, but the caps will ensure that you can still afford your home even with rate increases.
So, is an ARM right for you? That really depends on how long you plan to stay in the home.
If you’re looking to purchase your dream home, a fixed rate mortgage is still your best option. However, if you plan to be in the home for 10 years or less, an ARM could save you a small fortune. Ask your lender to provide you with options to see what rates you qualify for and if an ARM is right for you.
These are just a few options to explore when it comes to locking in the best rate on your home loan. Requesting quotes from more than one mortgage lender is always a good idea, and your LEAGUE agent is #readytoserve you in this process! Please feel free to contact us and we’d be happy to connect you with the right agent to help guide you or answer any questions you may have!