Following the presidential election, mortgage rates have increased at a rate lenders were not able to predict. After the Federal Open Market Committee announced an increase in the federal funds rate, the odds of a decline in interest rates are low.
Real estate lending firms like Primary Residential Mortgage, Inc., therefore, frequently remind homeowners of the importance of their financial circumstances and goals, especially when taking out a loan. How does one fulfill their dream of homeownership, then, in a rising mortgage rate environment?
More Cash Upfront Lowers Rates
Buying down mortgage rates would require buyers to “pay points.” A point is equivalent to 1% to the amount of the loan, so to those taking out a $350,000 mortgage, one point would amount to $3,500. It is possible for buyers to enjoy lower rates if they can pay points during the start or the close of their loan.
Paying points, however, means spending cash to pay for additional fees. It would be a big help to buyers, therefore, to have more cash at hand.
Consider Length of Stay and Mortgage Savings
Buying down the mortgage only makes sense if homeowners know how long they plan to stay on the property and their mortgage savings. Take, for instance, a prospective homebuyer that has to pay $2,000 in buy down for $30 worth of savings every month. Dividing the cost of buy-in with the total monthly savings concludes that it would take 66.7 months, or five and a half years to capture the return of the investment. The question is: does the homeowner see themselves staying on the property for that long?
Simply put: as long as homeowners have the cash and the time, then buying down their mortgage is a great way for them to save money.
Break-Even for Buying Down Rates Takes Time
The break-even time on buying down rates may vary among buyers, but they generally range from five to ten years. Short-term homeowners may opt for an adjustable mortgage instead, as they have lower interest rates that last for as long as 15 years. This is why buying down rates may not appeal to young, first-time buyers who might move out of the house after only residing in it for a few years.
Surviving in a high mortgage rate environment entails making wise financial decisions. For long-term homeowners, buying down rates is one of them.