There are many more ways to structure a home loan than people realize. Borrowers tend to focus exclusively on interest rates and miss out on other opportunities to save money and build wealth. Let’s talk about how choosing the right loan product, terms, and lender can significantly increase buying power.
After enjoying a long period of record-low interest rates, borrowers are now in an environment where rates are rising and the cost of a mortgage is increasing. A year ago a 30-year-fixed-rate mortgage was 2.98% and today’s rate is 5.7% , according to Freddie Mac. In the first quarter of 2022 we had the biggest climb in interest rates in 28 years. Rates are not expected to lower any time soon and most people expect they will continue to rise.
If interest rates are rising, where can you save money on a home loan? An experienced lender can perform a total cost analysis of your finances and recommend a home purchase plan that meets your long term goals. There are ways you can enter the market now and have a plan in place to restructure your mortgage as the market shifts.
Everyone’s situation is unique. Here are some topics we recommend borrowers discuss with their lender to better understand their loan options.
What type of loan and terms are best for me?
Traditional 30 Year, fixed-rate mortgages are a popular choice when rates are low and the market is predictable. When interest rates are higher and there is more uncertainty in the market, an Adjustable Rate Mortgage (ARM) becomes a better option. An ARM allows borrowers to lock in a lower rate for a short period of time – typically 5, 7 or 10 years – and can significantly lower monthly mortgage payments.
A 5/1 ARM is actually a 30-year mortgage loan. The ‘5’ means it has a fixed rate for the first 5 years of the loan. After that, the interest rate can change every ‘1’ year, for the remaining 25 years, depending on how markets are moving. The advantage is that during the first years of the loan when the rate is fixed, you would get a much lower interest rate and payment. And, if you plan to sell in less than six or seven years, a 5/1 ARM could be a smart choice.
Looking at your long term goals, an experienced lender can recommend the best loan type and terms. A top lender will continue to follow up with you on a consistent basis with market updates and helpful information to guide future financial decisions.
How much money should I put down?
With prices at record-highs, saving for a down payment is one of the biggest obstacles people face when buying a home. According to data from Attom Data Solutions, the average American pays about 6% of the home price for their down payment. If a borrower has the ability to put more money down they can save on their monthly payments, lower interest rates, and potentially avoid paying for Private Mortgage Insurance (PMI).
Have your lender evaluate all of your assets and help determine what down payment amount will bring you the best value over time.
Should I consider buying Mortgage Points?
One technique for lowering your interest rate is to buy mortgage points, often called “buying down the rate.” Essentially, you buy “points” to lower the interest rate on the loan. Each point costs about 1% of the mortgage amount. If you’re borrowing $500,000 then one point would cost $5000. Each point will typically lower your rate by .25% so if your starting rate was 5% and you bought a point, then your rate would go down to 4.75%.
If you can afford to buy mortgage points on top of your down payment and closing costs, it’s an effective way to pre-pay your interest. The key to making this beneficial is staying in the home long enough to recoup that prepaid interest. If you refinance or sell the home in a few years, you will end up losing money using this method. Talk to your lender about how long you plan to stay in your home and what you would like to do for your next home purchase.
How can I use a home loan to create wealth?
Questions like this are what distinguish top mortgage lenders from the rest. There are so many opportunities for homeowner and first-time buyers to create wealth through real estate. Understanding how to leverage a home loan to build a real estate portfolio can be a life changing experience. Find a lender who can talk strategy with you.
This article is intended to be accurate, but the information is not guaranteed and situations vary from person to person. Please reach out to us directly if you have any specific real estate or mortgage questions or would like help from a local professional.
Sources
The article is provided by Sparkling Marketing, Inc. with information from resources like:
https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/
https://themortgagereports.com/24637/what-is-better-5-year-arm-rates-or-15-year-fixed-rates
https://journal.firsttuesday.us/saving-for-down-payment-biggest-obstacle-to-homeownership/58659/