Creative Ideas as Mortgage Rates Rise
The FED's effort to battle inflation, by increasing interest rates, can be very frustrating, confusing and difficult for home buyers to understand. Many consider the volatility of rates to mean that they should not buy a home now, or that it is too difficult to buy a home with conventional lending. It is true that conventional mortgage rates are much higher than they were just a year ago, however, it does not preclude you from purchasing. Homeowning has many benefits including emotional, stabilized housing costs, and the financial benefits of building equity that make it a smarter decision than renting. With mortgage rates predicted to continue to rise in 2023, we thought this would be a great time to discuss some of the available options.
Conventional 5-1 ARMS
A Conventional 5-1 or 7-1 adjustable rate mortgage {ARM} loan is a 30 year mortgage. During the first five or seven years, the mortgage rate is fixed and after this, the rate is adjusted annually. Hence the name 5-1 ARM. When rates are volatile, and you anticipate rates going down after the original 5 or 7 year, this can be a good option. The advantage of this type of mortgage is the initial rate is lower than the traditional 30 year fixed rate mortgage. Another advantage can be that there's a better than 90% chance {based on the past 50 years of national statistics}, that you'll sell the home before the rates start rising. Buyers should ask their lenders about these loans, and how the adjustment is calculated. I have used these types of loans in the past and once the rate was due to adjust I benefited as my interest rate actually dropped during each of the first four adjustments after which I sold the home. Remember there's no way anyone can tell you for certain what interest rates will be 5+ years in the future.
Loans without Mortgage Insurance to Professionals
Some lenders are offering loans to professionals without private mortgage insurance, if they can prove they are reliable to repay a loan. Conventional loans typically require private mortgage insurance when the down payment is less than 20%, but in the case of a professional or those who require less lending, and who can prove they are a low risk, they can now get a mortgage without private mortgage insurance. This can easily save a buyer hundreds of dollars a month.
Mortgage Buy Downs
Another mortgage product that is a potential solution to borrowing affordability is a mortgage buy-down. A temporary mortgage buy down is when a borrower pays a much lower rate of interest in the first year or years of the loan and it gradually resets to the interest rate at the time of the loan. A standard mortgage buy down is when a borrower pays an upfront fee to permanently lower the interest rate. As many buyers are holding off purchasing now, lenders, sellers, and builders use these products to make home buying more affordable. An example of how one of these products may work would be a 3-2-1 buydown, in which the rate lowers by 3 percentage points in the first year, 2 in the second, and one for the third. For a home purchase of $430,000, the savings in the first year monthly are $450.
First-Time Home Buyer Programs
First-time home buyers have a number of options available to make their housing dreams a reality. Cash grants, mortgage rate discounts, and tax credits are just some of the ways that first-time home buyers are supported, regardless of interest rates. Why do we have these programs? Homeownership stimulates the local and national economies. Becoming a homeowner is not just a goal for many, but the proliferation of making this dream a reality is a financial health indicator in the US.
Seller Financing
Lastly, Seller Financing is a creative way for buyers to buy a home. How does seller financing work? In some instances, sellers will act as "the bank" and allow a buyer to make installments with interest that does not rely on a bank or traditional mortgage. The note is held privately until the loan is paid off, but the Federal Reserve does not insure it, and as such, it does not require the same insurance or is subject to rate changes. While not common, it's certainly worth exploring with your Realtor. Along these lines I've had several buyer clients whose parents and / or grandparents were willing to loan them the money and act as the bank. With the current stock market volatility and low interest rates being offered on savings accounts, if you have family members capable of loaning you the money to buy a home, it may be worth asking. Just like a seller, they will be paid an interest rate that you and they agree upon, and the loan will be secured by the house your buying the same way a bank secures the loan.
Are you looking to purchase a home in The Triangle? Are you curious what types of mortgage products would be available to you or your family? Would you like to learn more about how My NC Homes can help you become a homeowner? Are you interested in local first-time home buyer incentives? Contact My NC Homes. We have over 60 years of experience transacting real estate and we have helped home buyers through all types of markets; highs and lows. We want to give you the information you need to make smart, informed decisions and would like nothing more than help you achieve your real estate goals.
Posted by Larry Tollen on
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