In 2020 and 2021, we experienced an unprecedented shift in the real estate market. Interest rates for mortgage loans dropped to 2.65%, and demand for houses skyrocketed, which resulted in rising housing prices and outrageous bidding wars. Subject to ebb and flow, the real estate market always balances itself. When writing this blog, the average interest rate for a 30-year, fixed-rate mortgage is 7.106%.
While housing prices are adjusting to accommodate, high interest rates mean that people might have the same monthly payment for a $300,000 house today as they would have for a $600,000 house in January 2021. Most people would see their money go toward principal over interest, so the real estate market is slowing, but interest rates shouldn’t dissuade you from making an offer on your dream home. Instead, check out these three ways to beat rising interest rates when buying a home.
Buying Mortgage Points
How do mortgage points work?
Mortgage points are fees paid to a lender that lower the interest rate throughout your loan. One point costs 1% of your loan amount i.e., $2,000 per point for a $200,000 loan. Depending on the lender and loan program, one point typically lowers your interest rate by 0.25%. Purchasing mortgage points can save you money if you plan to own the house for a long time. To get the maximum benefit, you need to calculate how many years it would take to save the same amount of money on interest as you paid for the points.
Refinancing Your Mortgage
How does mortgage refinancing work? Can refinancing lower your payment?
When you refinance your mortgage, you trade your old mortgage for a fresh one with a new principal and interest rate. The lender then uses the new mortgage to pay off the old one. One of the most common reasons to refinance is to lower your interest rates and, therefore, your monthly payment. For example, you may want to refinance if you took your original mortgage loan at 7% and, a few years later, interest rates drop to 4%. You can also use refinancing to cash out the equity on your home and add or remove someone from the mortgage.
Consider an Adjustable-Rate Mortgage
When interest rates are high, you may opt for an adjustable-rate mortgage (ARM) over a fixed-rate mortgage. Many ARMs offer lower interest rates for a period, like three, five, seven, or 10 years. The downside of an ARM is that you take a gamble because, after the teaser period, your rate will adjust based on the margin and index outlined in your loan’s paperwork. Therefore, an ARM may initially save you money, but your interest rate could spike. An ARM may be the best option if you plan to own the home for only the teaser period and the teaser rate is lower than that of a fixed-rate mortgage.
When Is The Right Time To Buy?
Even though interest rates are higher now than they were a few years ago, you shouldn’t let that stop you from purchasing a home. For one, owning real estate will almost always be a better financial move than renting. Furthermore, you never know how interest rates will change – they could get lower, but they could also get higher or remain high for decades. With options like those outlined in this blog post, you don’t have to worry as much about rising interest rates. The best time to purchase a home will always be whenever you’re ready.
