How to lower yours mortgage rates
2017-01-03
Mortgage rates
took a big leap after the presidential election and are continuing to move
higher. Demand for homes is strong, but home prices are hitting new highs and
affordability is weakening.
For the average
buyer who was thinking about getting into a new home last summer, but didn't,
the monthly payment on that same home is now considerably higher. There is,
however, a way to lower it by buying down the rate.
"Buying your
rate down, or 'paying points,' means you're paying an extra fee on top of
standard loan fees like appraisal, underwriting and a credit report to get a
lower rate," said Julian Hebron, executive vice president of sales and
marketing at RPM Mortgage.
Of course that
means you have to have more cash upfront. The math isn't as complicated as it
seems. First, a "point" is 1 percent of the amount of your loan, so
if you are taking out a $200,000 mortgage, 1 point would be $2,000. Lenders
will lower your rate if you pay that point at closing, or, at the start of the
loan.
"If you were
getting a 30-year fixed loan of $325,000, you might get two options with and
without points. Today the option with zero points might show the rate as 4.25
percent, and the option with 1 percent in points — equal to $3,250 — might show
the rate as 4 percent," said Hebron. "Paying $3,250 at closing to
lower your rate by .25 percent lowers your payment $42 per month, and lowers
your interest cost $68 per month."
How do you know if
you should buy down the mortgage? It's all about time — how long you expect to
be in the home and have that same mortgage. What is the savings? Here comes
more math — this time from Matt Weaver, vice president of sales at Finance of
America Mortgage.
"We can
calculate this figure by taking the dollar value of the buy down and dividing
it by the monthly savings from the lower interest rate, then dividing that
figure by 12 months. So as an example, let's say our prospective homebuyer will
need to pay $2,000 in buy down to generate $30.00/month in savings. If we
divide $2,000.00/$30.00, we would conclude it would take 66.7 months, or 5.5
years, to recoup the cost of the buy down — now you can ask yourself, 'Do I
reasonably foresee myself staying in this home for at least 5.5 years?' in
order to truly capture the return on your investment," explained Weaver.
Sounds simple, if
you have the cash and the time, but buying down a mortgage, as with everything
else in housing, carries some risk.
"As they say,
'A dollar in the present is worth more than a dollar in the future.' The risk
with the uncertainty in length of ownership coupled with the possible need of
that same cash for any unforeseen expenses poses a risk for homebuyers
considering a buy down," said Weaver. "The buy-down strategy can be
worthwhile with a longer-term view in mind, longer term being defined as seven
years or greater."
The benefits can
also vary lender to lender. Shopping for the best rate is always a good plan
but even more important when you're looking to buy down.
"The
break-even time on buying down varies from lender to lender and from rate to
rate, generally in a range of five-10 years. Look at different combinations of
rates and upfront costs side-by-side and see which makes the most sense for
you," suggested Matthew Graham, chief operating officer of Mortgage News
Daily. "Heads-up: Some lenders with stricter interpretations of recent
regulatory changes no longer allow this flexibility."
If you really don't
see yourself in the home for more than seven years, or even 10, you might want
to consider an adjustable-rate mortgage (ARM). These carry much lower interest
rates and can be fixed for five, seven, 10, even 15 years. They were vilified
during the housing crash because so many people took them out and then couldn't
afford the payments when they adjusted, but the ARMs of today are not those of
years past. Read this for more
on ARMs.
One more thing to
consider is the rate itself. Mortgage rates are rising, but they are still near
historic lows. If you are really on the edge of homeownership, perhaps you're a
young first-time buyer, then buying down the rate is probably not for you. The
odds are you're going to want to be more mobile, and staying in the home for
seven years is longer than it sounds. Bailing out of the home before you
expected is a real risk.
"The other
risk of buying down your rate is that rates drop after you do so," cautioned
Hebron. "For now that risk is low. The Mortgage Bankers Association is
predicting that rates will rise about .375 percent from current levels during
2017."
While rates are expected to rise, the experts have been wrong before. Rates could just as easily come down and credit availability could loosen up, depending on how the new administration tackles mortgage reform. Rates are also sensitive to global financial markets, which are always a wild card, and especially so now.
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