Those of us in the business hear these comments often. As professionals we want to address our clients’ concerns with as much reality and creativity as we can.
First for the reality – Most experts agree that rates are not likely to drop down toward 3% again for a year or two or three years, or longer. Rates had been averaging around 5.5% to 6% over the 20 year period thru around 2021. That was the “norm”. But we got spoiled by those crazy low rates in 2022.
Next, the creativity – There are ways to reduce the interest rate on your loan that may work for you.
- Discount Points
o You can get a lower rate for the duration of the term of the loan by paying points up front. A one-point discount is 1% of the loan amount. So if you pay $ 2,000 on a $ 200,000 loan, that’s 1%. Your rate may be .5% or so lower. Most lenders offer multiple options. You could pay 3 or more points and get an even lower rate. To determine if this makes financial sense for you, you need to calculate the “return on investment”. For instance if the points are $ 2,000; divide by the savings in the principle and interest payment ( P & I ). If the P & I would have been $ 1,000 per month at a “normal” rate but is only $ 900 per month at the discounted rate, then $2,000 ( discount points ) divided by $ 100 savings is 20 months. That means if you keep that mortgage for more than 20 months, you may consider it a worthwhile investment of discount points.
- Buy Down
o Another option is a temporary Buy Down of the rate. This is like a temporary discount point. You could pay money to buy down the rate on a sliding scale for 1, 2 or 3 years, for example. Then, at the end of the period, the rate goes back to a pre-determined rate. This is useful if you believe you may be receiving an exceptional increase in income over that time period to allow you to better absorb the "normalized” payment when the time comes. Or, if you think you’ll want or need to refinance or payoff the mortgage during, or shortly after that time period, it could make sense. Also, you may be able to negotiate for the seller to pay this Buy Down fee for you !?
- Use an “Adjustable Rate Mortgage ( ARM )”
o There are some people that are afraid of ARMS because of the likely increase in rates over time. But, the initial ARM rate is usually much lower than a fixed rate. So, again, if you will be paying off the mortgage in a short period of time ( ie: 5, 6 or 7 years instead of 30 ), than you could save a lot of money in P & I. It’s definitely worth having your mortgage loan officer run some numbers for you so you can compare to other options and make an informed decision.
So don’t let the current interest rates scare you off. Look at all of your options and make the best decision for today. After you buy your home, check the rates each year or so, because at some point it’s likely that a refinance would be justified to lower your rate / monthly payment. Again, your mortgage loan officer can run those numbers for you and help you decide what’s best.
Good luck with your house search and have a great 2023 !
Sr. Loan Originator
NMLS # 1634140
Pharus Home Mortgage, LLC
1859 SE Port St Lucie Blvd
Port St. Lucie, FL 34952
NMLS # 1918708