Possible Responses for Homebuyers Facing High Interest Rates

The year 2022 has become the year of rapidly rising mortgage rates after several years of historically low interest rates. That’s not good news for homebuyers who also battled a seller’s market at the same time. However, there are things homebuyers can do to combat rising interest rates now that the market is shifting from a seller’s market to a balanced market for sellers and buyers.

Since the start of 2022, mortgage rates have more than doubled, rising from less than 3% to nearly 7%…

Red percent symbol inside symbolic house. The arrow indicates the percentage increase and decrease. Financial concept

If you are a first-time buyer, you may be looking for a home at the lower end of the market, perhaps with a purchase price of $325,000. But let’s look at something around the middle or slightly higher of the marker… yes, $600,000 has become slightly higher. You have good credit, but not perfect credit. In early 2022, you could have bought a $600,000 home with a 10% down payment and a 4% interest rate. In March, your monthly P&I payment would have been close to $2,535. Since interest rates for borrowers with good credit hit 7% in October, that payment would now be $3,535, a monthly increase of $1,000.

1. Lower your interest rate with points. It costs money to save money, but one of your best options might be to pay off your interest rate. Generally, each discount point costs 1% of your loan amount. So, if you were looking to borrow $590,000, one discount point would cost you $5,900 and would typically lower your rate by 25 basis points (0.25%). But before you do that, do the math because lowering your interest rate to 6.75 will still mean a monthly P&I payment of $3,502 – a measly saving of $33 per month. It will take you nearly 15 years to break even on this deal.

2. Consider an adjustable rate mortgage. Adjustable rate mortgages always become popular when interest rates rise, as they allow you to buy a new home with lower down payments, but beware of what might happen in the not-too-distant future. A 5-year ARM could get you a 6% loan today. Your monthly payment would be approximately $3,370, a monthly savings of $165. But that interest rate could go up to 2% in as little as 6 months. This would mean that in 6 months your payment could jump to $4,250. That’s a lot of risk for very little short-term reward.

3. Go for a shorter term loan. Lenders also consider their risks. The longer they lend you money for years, the more risk they run. If you reduce the term of your loan, lenders will give you a lower interest rate. Today, you might be able to get an interest rate of 6.4% on a 15-year mortgage. Your monthly payment would be higher at $4,675, but you’d pay off the loan in half the time and save a ton of money doing it this way.

4. Make a larger down payment. This can become a point of negotiation with your lender because you become a less risky borrower when you have more skin in the game. If you can increase your down payment by 10% to 20%, several good things can happen to you. You will probably get a better interest rate. You won’t have to pay for private mortgage insurance. And you might even be able to get the lender to waive the appraisal.

5. Consider all of your loan options. You may be able to get a lower interest rate and little or no down payment by qualifying for a type of loan that meets your particular needs. Conforming, FHA, VA, and USDA loans can all offer great deals, but you need to find the type of loan that best suits your needs. Shop around rather than taking the first loan offer you’re approved for.

6. Mortgages are a competitive business. By shopping around for different lenders and loan types, you can find the best deal for your needs. Get quotes from at least three to four lenders, including banks, savings and loan institutions, credit unions, online lenders, and even wallet lenders. Compare their offers to see who offers the best rates and conditions.

7. Improve your credit. When you hear that interest rates approach 7%, it’s only for the most qualified borrowers. With exorbitant purchase prices and high interest rates, the most important thing you can do is have good credit. Today, lenders are competing for business. They will grant the best interest rates to the most qualified borrowers.

8. Work with a mortgage broker. Make the competitive loan market work in your favour. You may be able to get a more favorable interest rate if you work with a mortgage broker rather than banks and individual lenders. A mortgage broker can place borrowers into the best program that meets an individual’s financing needs.

What suggestions can you add on getting the best interest rate available? Please leave your comment.

Brian Kline has been investing in real estate for over 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga and uRBN. Brian is a regular contributor to Realty Biz News

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