Some homebuyers are facing a “payment shock”. Ways to save on a mortgage

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Even with signs that the housing market is cooling down, home buyers continue to feel the sting of high 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% in early 2022, according to Mortgage News Daily. On top of that, home prices – the median is $ 435,000 – have increased by an average of 13.1% from a year ago, according to Realtor.com.

“I think the main problem is the payment shock,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit with customers and the fare is between 6, their payment is sometimes outrageous.”

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The difference that interest rates make can be significant. For example: On a $ 300,000 mortgage at 6.5% over 30 years, the monthly payments for principal and interest alone would be $ 1,896. The same 3% loan would involve a payment of $ 1,264 (a savings of $ 632 per month). Other charges like property taxes or mortgage insurance would be in addition to those monthly amounts.

Yet there are ways to reduce the cost of buying a home. While there is no one-size-fits-all approach, you can evaluate the various options available to you and assess whether any of them make sense for your situation.

Here are some options.

An ARM could be a short-term answer

It may be worth considering an adjustable rate mortgage. With an ARM, as it is called, the appeal is its lower initial rate than a traditional fixed-rate mortgage.

That rate is fixed for a certain period of time – say, seven years – and then adjusts up, down, or stays the same, depending on where the interest rates are at that time.

While there is a limit to how much the fare can change, experts recommend making sure you can afford the maximum fare if approached along the way. As illustrated above, a few percentage points can make a big difference in the monthly payment.

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

Or, if you plan to move before the initial fee period expires, an ARM might make sense. However, since life happens and it is impossible to predict future economic conditions, it is wise to consider the possibility that you will not be able to move or sell.

Also, 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 don’t offer much in the way of a discounted rate, he’s finding some that are about a percentage point or more lower.

15-year mortgages reduce the interest you pay

While the typical mortgage is for 30 years, a shorter loan with a more favorable rate can be tempting. The average rate for a 15-year loan is 6% as of Friday, according to Mortgage News Daily. Plus, you save an interest load over the life of the loan and create equity in your home faster.

For example: A $ 300,000 30-year mortgage with a 6.5% fixed rate would mean paying $ 382,786 in interest over the life of the loan. By comparison, a 15-year mortgage, even at the same rate, would result in paying $ 170,438 in interest on the loan.

It is not only the difference in the rate, but also the increase in equity.

David Demming

President of Demming Financial Services

“It’s not just the rate difference, but also the capital accumulation,” said certified financial planner David Demming, president of Demming Financial Services in Aurora, Ohio.

At the same time, he said, if the higher payout cuts your budget too much, it might not be the best route.

First-time home buying programs can help with costs

If you are buying a home for the first time with limited means, you may be able to qualify for one of the federal programs available that help you buy a home with a lower down payment and reduced closing costs. Additionally, state and local (city or county) governments often offer interest-free grants or loans to help buyers cover down payment and closing costs.

In some cases, works for rent

Sometimes, a potential home buyer may not be able to immediately qualify for a mortgage due to credit problems or short work history. Or, they may need more time to save for a down payment but want to move into a home and stay there.

In these cases, it may make sense to consider a lease or rent to own. A common aspect of these deals is that a portion of the monthly rent goes into an escrow account until the purchase date a couple or a few years later, at which point the amount deposited goes towards closing costs or a down payment. . But if you walk away or otherwise can’t fulfill their contractual obligations, the money is forfeited.

When considering taking this route, it’s important to do 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.

Purchasing “points” can also save on closing costs

You may be able to negotiate closing costs, such as the commissions you pay for various aspects of the home buying process or by using a low-cost securities company. Or, the seller may be willing to pay some of your costs, depending on the competing offers presented.

You may also be able to buy extra “points” – one point is worth 1% of the loan amount – to get a lower interest rate.

However, Rinaldi warns that since it can take years to break even when going down this route, it may not be worth it.

“You don’t want to pay extra origination fees because if you refinance, it’s lost money,” Rinaldi said.

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