Last week the big news was the escalation of mortgage rates and the prediction by the mortgage “experts” that we’re not seeing them being lowered anytime soon. This week we’ll touch on ways to maybe achieve a lower rate and help buyers get their foot in the door. There are a few strategies that could help buyers secure a lower mortgage rate now and revisit the loan down the road, but it may not be for everyone.
The first one is a temporary buydown in which a seller, or more frequently a builder, pays an upfront fee to reduce a buyer’s mortgage rate for a specified period of time. It can give a buyer, especially first-time buyers, time to ease into higher payments if they expect their personal incomes will rise in the future or if traditional mortgage rates decline. There are lenders that offer it, but typically builders use it as an incentive for home buyers instead of reducing their price.
There are a variety of temporary buydowns out there with terms that involve number of years and percentage of rate drops. However, all of the temporary buydown arrangements are based on the buyer qualifying for a mortgage based on the current mortgage rate as well as having a high credit score. If you qualify, it’s still worth it, especially in the early years of home ownership, which are always the most expensive.
Another strategy is buying discount points. Essentially what you’re doing is buying the prepaid interest at closing to reduce the size of the mortgage in return for a lower rate. The lower rate is for the life of the mortgage, which can be a substantial savings if you’re planning on living in the home for a long time.
The difficult part of buying discount points and the additional fees that are assessed is that you will require a large down payment. If you have the cash to do this, you need to determine the break-even point, which is the level you save more money than you spend. If this makes financial sense, it could be a good option.
Finally, assumable mortgages can help keep rates down if you can find one. This loan allows a seller to transfer his or her mortgage to a buyer who in turn picks up the remaining loan balance, the repayment period and other terms of the seller’s existing mortgage. All of this sounds great if the seller’s rate is considerably lower than what the buyer can secure at this time. Buyers still need quite a bit of cash to cover the difference between the loan balance and the selling price and they also need to qualify for the loan just like any other mortgage product.
There certainly are a lot of assumable mortgages out there, however, they are generally not conventional mortgages. Most if not all of these loans are government-backed or insured loans by the FHA or VA. It’s also not a simple process for either the buyer or seller and may require some legal advice for the novice.
Getting a lower mortgage interest rate in this financial environment is difficult, but if you have the means, the nerve and a little bit of luck, it could happen. In the meantime, sit tight and see what develops between now and the end of the year. The country is going through many changes and so are the mortgage markets.
