Some homebuyers are facing ‘payment shock.’ Ways to save on a mortgage


Noel Hendrickson/Getty Images

Even with signs that the housing market is cooling, homebuyers are still feeling the sting of elevated 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 start of 2022, according to Mortgage News Daily. Alongside that, home prices — the median is $435,000 — are up 13.1% on average from a year ago, according to Realtor.com.

“I think the major problem is payment shock,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit down with clients and the rate is in the 6s, their payment is outrageous sometimes.”

More from Personal Finance:
Car buyers pay 10% above the sticker price, on average
62% of workers reduce savings amid economic worries
Here’s how to prepare for student loan forgiveness

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

Yet there are ways to reduce the cost of buying a house. While there’s no one-size-fits-all approach, you can evaluate 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

An adjustable rate mortgage may be worth considering. With an ARM, as it’s called, the appeal is its lower initial rate compared with a traditional fixed rate mortgage.

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

While there’s a limit to how much the rate can change, experts recommend making sure you’d be able to afford the maximum rate if faced with it down the road. As illustrated above, a few percentage points can make a big difference in the monthly payment.

Median home price as a percentage of income is up 46% since the start of the pandemic

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

Or, if you anticipate moving before the initial rate period expires, an ARM may make sense. However, because life happens and it’s impossible to predict future economic conditions, it’s wise to consider the possibility that you won’t be able to move or sell.

Additionally, 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 aren’t offering much in the way of a discounted rate, he’s finding some that are about one percentage point or more lower.

15-year mortgages reduce what you pay in interest

First-time homebuyer programs can help with costs

If you’re a first-time homebuyer with limited means, you may be able to qualify for one of the federal programs available that help you buy a house with a lower down payment and reduced closing costs. Additionally, state and local governments (city or county) often offer grants or no-interest loans to help buyers cover their downpayment and closing costs.

Rent-to-own works in some cases

Sometimes, a potential homebuyer might be unable to qualify immediately for a mortgage due to credit issues or short work histories. Or, they might need more time to save for a down payment but want to get in a house and stay put.

In those cases, it may make sense to consider a lease- or rent-to-own contract. One common aspect of these arrangements is for a portion of the monthly rent to go into an escrow account until the date of purchase a couple or few years down the road, at which point the your escrowed amount goes toward closing costs or a down payment. But if you walk away or otherwise can’t meet their contractual obligation, the money is forfeited.

If you consider 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,’ trimming closing costs can save, too



Source link