How to Avoid High Mortgage Rates
It’s no secret that mortgage rates have been climbing, forcing many home buyers out of the market or the price range they were aiming for. The recent increases made a big impact in the real estate market, resulting in a shift from a seller’s market to one that is more in favor of buyers.
One example of this is a steady decline in home sales. According to NAR, total existing home sales across the US have dropped for 11 consecutive months, hitting 4,020,000 in December 2022. This was a 34% decrease from total existing home sales in December 2021.
Along the same timeline, the average 30-year fixed-rate mortgage (FRM) rose from 3.55% in February 2022 to 6.49% at the beginning of December 2022 (Freddie Mac). We can see that the unprecedented buyer demand of the early 2020’s has slowed in accordance with rising rates.
What are the current mortgage rates?
Even though mortgage rates are higher than they were in the past two years, rates are no longer rising as quickly as they were throughout 2022. In fact, they have inched downward in recent months. As of February 2, 2023, Freddie Mac reports that the average 30-year FRM is 6.09%, and the average 15-year FRM is 5.14%. Still, some buyers are avoiding the market due to high rates.
It is understandable that buyers would want to wait for rates to drop again, considering the impact they make on your monthly payment. So, as a buyer, how can you avoid the high mortgage rates and take advantage of buying in a less competitive market?
How to Avoid High Mortgage Rates?
In this blog post, we will be discussing two ways to avoid high mortgage rates, including an adjustable-rate mortgage and a seller buy-down. These options are different from each other, but they both help buyers temporarily lower their mortgage rate, and therefore, their monthly payment. Let’s dive in!
An adjustable-rate mortgage (ARM) is the opposite of fixed-rate, meaning the interest rate that you pay changes instead of staying the same over the life of the loan. However, when you first obtain the loan, you will have a temporary fixed rate, which is typically lower than the market rate on normal FRMs. According to Rocket Mortgage, this is known as the introductory rate, and may last anywhere from 3-10 years.
After this period, your interest rate will fluctuate according to the market. This means that your monthly payment could go up or down, making it difficult to plan a budget in advance. The type of ARM you choose will determine the frequency at which your rate changes. Most often, it will either change once a year or every six months (Rocket Mortgage).
ARMs may be a good option for someone who is not planning to stay in their house longer than the introductory period. Although, even if you are staying long-term, you can always refinance your loan to obtain a permanent fixed-rate if you would rather have predictable monthly payments.
Another option to temporarily avoid higher rates is a seller buydown. Currently, the most popular version of this is a 2-1 buydown. Let’s say you were eligible for a 6% interest rate on your mortgage. If the seller was offering a 2-1 buydown, your rate would be 2% less in the first year, 1% less in the second year, then it would revert to the original rate of 6% from year 3 onward.
2-1 Buydown Scenario
Let’s look at the benefits of a 2-1 buydown for a 30-year FRM on a $300,000 house with a 5% down payment. At a 6% interest rate, your monthly payment would be $1708.72 before taxes and insurance (mortgagecalculator.org).
Year 1: Interest rate is 4%
- Monthly payment is $1,360.63
- Monthly savings of $348.09
Year 2: Interest rate is 5%
- Monthly payment is $1,529.94
- Monthly savings of $178.78
The total savings over two years would be $6,322.44. The seller would simply cover that amount for the buyer in the form of closing costs. This is beneficial to the seller as well, because they can help the buyer save a significant amount on their monthly payment for two years without lowering the sale price of their home and sacrificing thousands more dollars.
Once again, buyers always have the option to refinance their loan if interest rates go down after they close. If they do this before the full two years have passed, any unspent money from the 2-1 buydown can be used by the buyer to cover the cost of refinancing.
These two options for temporarily lowering your mortgage rate may work great for many buyers, but there are other ways to ensure you end up with an affordable mortgage rate and monthly payment. First, be sure to work with a local lender in the area where you are buying. Oftentimes, these lenders are more knowledgeable about the local market, more personable to work with, and can help you find a mortgage that fits your unique financial situation.
Second, don’t be afraid to shop around with different lenders to compare interest rates and APRs. Knowing all your options can help you make the most sensible and budget-friendly choice. Remember, you can always buy down your own interest rate by paying discount points. This will cost you more money upfront, but it will save you more over the long-run, and the lower interest rate you receive will last for the life of the loan.
Despite what you may hear or think about the current real estate market, it is still a good time to buy. With less competition to drive up prices, more inventory to choose from, and more opportunity for buyers to negotiate, buying a home is easier than it has been in recent years. If high mortgage rates are the only thing preventing you from taking the next step in your home-buying journey, you no longer have to worry.
It’s time to get connected with a dependable local real estate agent. Our agents here at Sheridan Solomon and Associates can walk you through the entire buying process, help you find excellent mortgage lenders, and get you started in your home search.
Give us a call at (478) 746-2000 or contact us on our website, www.sheridansolomon.com.