Navigating a Rising Mortgage Rates Environment in 2022

As we close out the third quarter of 2022, mortgage rates have hit a 20-year high. The 30-year rate on fixed-rate mortgages sits at just over 7% now.

If you need to buy a home or refinance your current mortgage, what can you do to save on your mortgage right now? Let’s explore some money-saving ideas so you can lower your payment.

How Home Buyers Can Get a Lower Mortgage and Payment

If you have been looking for a home recently, you may have noticed that the real estate market is softening a bit across the nation.

Several factors, such as rising rates, steep increases in home prices, and a shortage of homes for sale, have caused home sales to drop sharply. The media has done a great job of creating an illusion that the market is tanking even more than it really is. This is good news for home buyers, though.

In recent years it has been nearly impossible to negotiate prices on homes, let alone ask for terms that would help buyers get into those homes. Sellers have been getting whatever price they ask for, and then some.

It wasn’t uncommon for home buyers to pay tens of thousands or even hundreds of thousands of dollars over the asking price and even over the appraised value. That is mostly a thing of the past today. Home buyers seem to be getting back into the driver’s seat.

So how do you use this new market environment to your advantage to get a lower mortgage on a home purchase? Here are some practical ideas:

Negotiate Rate Buydowns to Lower Your Mortgage Rate and Payment

Right now that the Real Estate market is a bit soft, especially during the fall and winter seasons, buyers can negotiate more favorable terms when buying a home.

One helpful strategy is asking the seller to pay points to buy down the rate on the buyer’s loan. Home sellers and agents are more motivated now than they have been in years. Buyers can now ask for closing costs to be paid, and points can be part of closing costs.

Here is an example of how this is effectively done in today’s market. We will take a hypothetical example of a house priced at $420,000, just below the average price of homes in the entire nation. We will use a 10% downpayment and finance 90% of the purchase price.

Instead of negotiating the price down to $400,000, you can offer full price with the seller paying 5 points towards buying down the rate on your loan. 5 points should be able to lower your mortgage rate by one percent. We can use a rate of 6.75% and estimate the rate would go down to 5.75% with five points.

Purchase price$400,000$420,000
Loan amount$360,000$378,000
Interest rate6.75%5.75%
Mortgage payment$2,335$2,206
Payment Difference$129 a month / $1,548 a year

As you can see here, the buyer would be saving $1,549  a year taking this option if the seller agrees. And why would the seller not consider it? They are getting the same net purchase price in both cases, yet the buyer benefits quite a bit from having the seller pay to buy down the rate.

In fact, there are cases where this structure can make the difference between the buyer qualifying for the house or not qualifying. If you are a buyer and your Debt To Income (DTI) ratio is too high, a rate buydown can save the deal by lowering that DTI rate so you can qualify for the purchase.

Choose a 5/1 ARM

Home buyers don’t have to take a 30-year fixed loan all the time. We know it’s a popular option when rates are in the low 3s; there is no reason to do anything but a fixed rate. However, it’s time for a different strategy when mortgage rates are twice that.

One thing we know for sure is that rates go up and down. Right now, we have had an unusually sharp spike in interest rates due to many different factors. However, there will be lower rates down the road based on historical evidence, although we can’t guarantee that, of course.

So let’s say you could get a 5/1 ARM at 1% below the 30-year fixed rate right now. If we look at the same house purchase as we did in the previous example, here is what that would look like. In this case, we will assume the same purchase price for both scenarios. We will anticipate that you can just negotiate the purchase price and not ask the seller to pay any points toward buying the rate down.

Purchase price$400,000$400,000
Loan amount$360,000$360,000
Interest rate6.75%  (30yr Fixed)5.75%   (5/1 ARM)
Mortgage payment$2,335$2,101
Payment Difference$234 a month / $2,808 a year

As you can see, the monthly payment is much better using the 5/1 ARM loan. So why would any buyer not take this option? The uncertainty of rates in the future. Although we can look back at 50 years of mortgage rates and see they fluctuate up and down, some of us are just not comfortable with not knowing for sure where we will be in five years.

If you can tolerate a little bit of risk, do keep in mind that 5/1 ARMS have limits on how much they can go up. You are not exactly going to lose your house if the rates are still up five years down the road. Even if they are, you have options: you can always refinance to another 5/1 ARM and keep the low rates going for another 5 years.

Making the Best of What Rates We Have

Although rates have gone up, it does not have to mean an end to your dreams of owning a home. Keep in mind we had rates of over 12% for many years. Compared to those, 7% is a bargain!

As always, buying a home is a long-term investment in the American Dream. Don’t be dissuaded by current rates. You can own a home for a lifetime, but your loan can change over the years to take advantage of lower mortgage rates.

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