Some homebuyers face "payment shock."  Ways to save on a mortgage

Some homebuyers face “payment shock.” Ways to save on a mortgage

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Even with signs the housing market is cooling, homebuyers are still feeling the sting of higher prices and higher interest rates.

The average rate on a 30-year fixed-rate mortgage is 6.7% as of Friday, up from 3.3% at the beginning of 2022, according to Mortgage News Daily. On top of that, home prices ($435,000 average) are up 13.1% on average from a year ago, according to Realtor.com.

“I think the main issue is the impact of payments,” said Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit with clients and the fee is 6 shillings, sometimes their payment is outrageous.”

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The difference interest rates make can be significant. For example: On a $300,000 mortgage at 6.5% for 30 years, the monthly principal and interest payments would only be $1,896. That same 3% loan would result in a payment of $1,264 (a savings of $632 per month). Other charges, like property taxes or mortgage insurance, would be on top of those monthly amounts.

However, there are ways to lower the cost of buying a home. While there is no one-size-fits-all approach, you can review the various options available to you and consider whether any of them make sense for your situation.

Here are some options.

An ARM could be a short-term answer

It may be worth considering an adjustable rate mortgage. With an ARM, as it’s called, the lure is its lower initial rate compared to a traditional fixed-rate mortgage.

That rate is fixed for a set period of time, say seven years, and then adjusts up, down, or stays the same, depending on where interest rates are at the time.

While there is a limit to how much the rate can change, experts recommend making sure you can afford the maximum rate if you are faced with it in the future. As illustrated above, a few percentage points can make a big difference in your monthly payment.

Keep in mind, however, that at any point before the rate adjusts, you may be able to refinance your mortgage, Rinaldi said.

Or, if you plan to move before the initial rate period expires, an ARM may make sense. However, because life happens and future economic conditions cannot be predicted, it is wise to consider the possibility that you may not be able to move or sell.

Also, if the ARM rate isn’t much lower than a fixed rate, the savings may not be worth the uncertainty. Rinaldi said that while some lenders don’t offer much in the way of a discount rate, he is finding some that are about a percentage point or lower.

15-year mortgages reduce what you pay in interest

While the typical mortgage is for 30 years, a shorter loan with a more favorable rate may be attractive. The average rate for a 15-year loan is 6% as of Friday, according to Mortgage News Daily. Plus, you save a lot of interest over the life of the loan and build home equity faster.

For example: a 30-year, $300,000 mortgage with a 6.5% fixed rate would mean paying $382,786 in interest over the life of the loan. By comparison, a 15-year mortgage, even at the same rate, would result in paying $170,438 in interest over the loan.

It is not only the difference in rates, but also the accumulation of capital.

david demming

President of Demming Financial Services

“It’s not just the difference in rates, but also the accumulation of capital,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio.

At the same time, he said, if the higher payment squeezes your budget too far, it may not be the best route.

First-time homebuyer programs can help with costs

If you are a first-time homebuyer with limited resources, you may qualify for one of the available federal programs that help you purchase a home with a lower down payment and reduced closing costs. In addition, state and local (city or county) governments often offer grants or interest-free loans to help buyers cover down payment and closing costs.

Hire-to-own jobs in some cases

Sometimes a prospective homebuyer may not be able to immediately qualify for a mortgage due to poor credit or short employment history. Or, they may need more time to save for a down payment, but want to get into a home and stay where they are.

In those cases, it may make sense to consider a lease or rent-to-own agreement. A common aspect of these arrangements is that a portion of the monthly rent goes into an escrow account until the date of purchase in a couple of years, at which time the amount escrowed goes toward closing costs or payment. initial. But if he walks away or fails to fulfill his contractual obligation, the money is lost.

If you’re considering going this route, it’s important to do your due diligence and make sure you understand the terms of the contract, including the type of mortgage the property is eligible for and how the purchase price will be set, Demming said.

Buying ‘points’ and cutting closing costs can also save

You may be able to negotiate closing costs, such as the fees you pay for various aspects of the home buying process or by using a lower-cost title company. Or, the seller may be willing to pay some of his costs, depending on competing offers.

You can also buy additional “points” (one point is worth 1% of the loan amount) to get a lower interest rate.

However, Rinaldi warns that because it can take years to break even when going this route, it may not be worth it.

“You don’t want to pay extra origination fees because if you refinance, that’s money lost,” Rinaldi said.

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