Blog posted On August 31, 2023
Mortgage interest rates tend to be very cyclical. They regularly rise and fall depending on factors like inflation and the general health of the economy. If you’ve found yourself looking for a home when rates are rising, it can seem like the long-term affordability of homeownership is out of reach. However, there are options for home buyers in almost every housing market. This article will look at the viability of options like adjustable-rate mortgages, temporary buydowns, rate locks, and refinancing.
Adjustable-Rate Mortgages (ARMs): Short-Term Savings vs. Long-Term Risks
Getting an adjustable-rate mortgage (ARM) when interest rates are high might seem counterintuitive, but it could be a great way to save on a home purchase.
Let’s start with a clear definition. ARMs are a type of home loan where the interest rate fluctuates periodically based on changes in a specified benchmark. To compensate for this uncertainty, ARMs typically offer lower initial interest rates compared to fixed-rate mortgages.
This can translate into lower monthly payments during the initial fixed period of the ARM, which is usually around 5 to 10 years. This initial period can give you time to weather the high-interest rate environment without committing to higher fixed rates.
Another possible benefit of an ARM is that it will adjust with the market. That means if interest rates decrease in the future, your adjustable rate might end up lower than the prevailing fixed rates at that time. This could lead to potential savings over the life of the loan.
As you can imagine, however, ARMs do come with risks. After the initial fixed period, the interest rate on an ARM can rise, potentially leading to higher monthly payments. Be sure to talk with your lender to learn if the benefits of an ARM will outweigh the drawbacks.
Temporary Buydowns: Ease Into Your Rate
Temporary buydowns offer another great option for home buying in times of high rates. A temporary buydown is offered by a seller or home builder who pays your lender additional upfront points to reduce the initial interest rate on your mortgage for a specific period. This results in lower monthly payments during the initial years of homeownership, which can be a real help to your budget as you ease into homeownership.
These are some common buydown options:
Lowers your monthly payment for the first three years. Year one bases your payment on an interest rate that is 3% lower. Year two bases your payment on an interest rate that is 2% lower. Year three bases your payment on an interest rate that is 1% lower. Then years 4-30 your mortgage payment returns to its original level.
Lowers your monthly payment for the first two years. Year one bases your payment on an interest rate that is 2% lower. Year two bases your payment on an interest rate that is 1% lower. Years 3-30 your mortgage payment returns to its original level.
Lowers your monthly payment for the first year. Year one bases your payment on an interest rate that is 1% lower. Years 2-30 your mortgage payment returns to its original level.
As the name suggests, a temporary buydown is only meant to bridge the gap for home buyers who believe their budget help with the extra buffer that a few years of low interest can provide. A comprehensive analysis of both your immediate financial position and the long-term financial affordability of a home purchase is necessary before deciding.
Rate Locks: Securing Today's Rate for Tomorrow's Purchase
As you think about buying a home, be sure to give some serious thought to a rate lock. They allow you to secure the current interest rate for a specific period while you complete the home buying process. For example, we offer a rate lock of up to 90 days.
This can protect you from rate increases in the market while you shop for a home, make an offer, and work to close on the property. In a volatile market, a rate lock can offer some stability.
Refinancing: Play the Long Game of Homeownership
If you’re unhappy with the rates available to you as a home buyer, consider incorporating a refinance into your long-term plans. A refinance replaces your current mortgage with one that applies the interest rates that are current during the time of closing. While it won’t lower your rate immediately, here are a few ways you can use a refinance to your benefit.
No matter what the current rates are, you’ll want to work with a mortgage professional who can provide guidance tailored to your specific situation. By doing so, you arm yourself with knowledge and a clear understanding of your financial picture that will let you confidently make mortgage decisions that align with your needs, even in the face of rising rates.