Ways to Offset Higher Mortgage Rates
For a number of years, we've had the benefit of the lowest mortgage rates in history. But over the last year, things have changed. The reason? Inflation is at an all-time 40-year high and The Fed had to raise the Fed Funds rate several times to slow it down. Although the Fed does not directly impact mortgage rates, inflation is what negatively affects all rates. This has caused a good amount of stir in the housing industry where lenders, buyers, and sellers have had to pivot to alternative mortgage options to offset the rapid rise in rates. We are now seeing mortgage programs we haven't seen in years, but the good news is, they can provide options to get a lower mortgage rate. We've provided a few below.
Adjustable Rate: Although most borrowers prefer a fixed mortgage rate such as a 15 or 30-year, adjustable-rate mortgages also have some great advantages. Adjustable doesn't mean your rate will adjust immediately, in fact, most types are fixed for a certain number of years before they adjust. For example, a 7-year arm has a fixed rate for the first 7 years. Most borrowers will have already refinanced or even moved before this fixed period ends so they've been able to enjoy the lower rate without an adjustment.
Rate Buydown: Mortgage rate buydowns have always been available but less common with rates as low as they've been over the last several years. In a rising rate environment, they've become popular again. Rate buydowns can happen by buying the rate down with discount points or through a seller concession where the seller agrees to pay for a portion of the buyer's closing costs which can be used to buy down the rate. Gift money can also be used to buy down the rate if applicable.
Temporary Buydown: These mortgage programs have also been around for many years but have been less necessary because rates have remained relatively low for some time. A temporary buydown such as a 3-2-1 or 2-1 buydown is a mortgage that allows the borrower to pay the mortgage at a lower interest rate for the first couple of years. For example, a 2-1 buydown allows a borrower to pay a 30-year mortgage at 2% lower for the first year, then 1% lower in the second year, and the fully amortized rate for years 3 through the remaining term of the mortgage.
Bottom line: No matter how high or low mortgage rates go, homeownership has always been part of the American dream and the future wealth plan for many. There are always programs to help people achieve this opportunity. Talking to a trusted loan officer who can provide the options available to you is a great place to start.
Source: Mortgage Market Guide, Guy Vetrano
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