A real estate agent stands at the entrance as Giovanni and Nicole Queiroz of Brooklyn, New York visit an open house in West Hempstead, New York.
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After dropping to record levels in 2020 and 2021, mortgage rates are back on the rise. Well done. While the past few weeks have seen a reversal in the rise, at nearly 6%, current mortgage rates are still twice what some homebuyers have been paying in recent years. With rising inflation and the potential for further price increases, some home buyers are canceling deals, and potential home buyers may be looking for ways to lower their prices.
Here are five possible options to save money.
1. Try to boost your credit score
Daniel Rodriguez, chief operating officer of wealth management firm Hill Wealth Strategies, said consumers may be able to improve their credit scores in as little as a month. Start by checking for inconsistencies on your credit report that can make your debt situation seem worse than it really is, he said. Also, if you have cash, pay off your debt to reduce your debt-to-credit ratio.
Once you’ve taken positive steps to improve your credit, consider asking your lender to start a process called a rapid reassessment as a way to get positive changes to your credit updated quickly—usually within a week instead of 30 to 60 days.
“Anything helps. Even if it’s just five points, it can make a huge difference,” said John W. Mallett, president of MainStreet Mortgage, a mortgage broker in Westlake Village, California.
2. Comparison Store
Compare offers between a variety of lenders and products. A local bank or credit union where you do important business can offer more competitive rates than a large bank you have not worked with before. You can also try out a mortgage broker to compare rates from many different lenders.
A mortgage bank, which specializes in housing loan products, could be another option. Before arriving, it’s a good idea to get a basic idea of what’s available using online tools like Bankrate.com or NerdWallet.
3. Consider paying points
Mortgage points are charged to the borrowing country from the lender at a reduced interest rate. Each point equals 1% of the total loan amount.
Here is a hypothetical example of a $200,000 loan considering only principal and interest. With zero points and an annual interest rate of 4.5%, the monthly payment would be $1013.37, according to an example from Bank of America. At one point, the buyer will pay $2,000 for an annual interest rate of 4.25% and a monthly payment of $983.88. The total savings on a 30-year loan would be $10.616.40, assuming the buyer owns the home for the entire term and does not refinance it. With two points, the buyer will pay $4,000 for an APR of 4% and a monthly payment of $954.83. The total savings on this loan will be $21,074.40, assuming the buyer has owned the home for the full 30 years without refinancing.
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Be sure to analyze the numbers, considering factors such as how long you expect to own the home. With the two-point option, for example, you’ll save $58.54 per month, compared to the no-point loan option. But given the initial cost of $4,000, it could take 68 months to break even, according to Bank of America.
If you’re going to keep the loan long-term, Mallett said, you’d better pay points to get a lower rate.
4. Make a larger down payment
Instead of a 20% discount, consider paying a little more up front. This strategy will lower the loan-to-value ratio for the buyer and possibly reduce the lenders’ risk, said John Keratsis, president and CEO of mortgage lender Deephaven Mortgage. “This may make borrowers more suitable candidates for a low-interest loan.”
The amount of the drop depends on the lender and the product, says Josep Rubina, chief executive of Milo, a fintech company that provides loans to home buyers.
Of course, there can be downsides to this strategy as well. You need to make sure you have the money to do this, without exhausting the required reserves.
5. Consider other types of loans
One option is an adjustable mortgage, or ARM.
As of July 11, the average annual percentage rate for a 30-year fixed-rate mortgage was 5.75%, according to a national survey by Bankrate. By contrast, Bankrate lists the average market annual interest rate at 1/5 ARM, which means the rate remains the same for five years, as 5.53%. Banker said the average annual interest rate on 7/1 ARM, where the introductory rate remains constant for seven years, is 4.98%.
Another option could be a fixed interest only mortgage that is amortized over 30 years and allows the borrower to pay interest only initially, say for 10 years. You’ll pay more over the life of the loan, Robina said, but this could be an especially attractive option if you plan to hold the property for less than 10 years.
When evaluating the economics of these types of loans, he said, how long you plan to hold the property is an important consideration that potential buyers should carefully evaluate.
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