Battle Rising Mortgage Rates: 5 Tips
An improving housing market is great for the economy but not necessarily for first-time homebuyers. According to studies, mortgage rates rose from 3.49 percent in May up to 4.69 percent in August. While rising mortgage rates certainly make transactions more expensive, they shouldn’t deter your purchase. Here are five ways you can buy a home despite higher mortgage rates.
Make a Bigger Down Payment
A larger down payment can ease the pain of housing payments. Not only are you financing a lower balance, but if you make a down payment of 20 percent, you eliminate private mortgage insurance (PMI). For example, a 30-year, $250,000 loan at 4.5 percent with a 20 percent down payment ($50,000) has a monthly payment of $1,353. That same purchase with a down payment of 5 percent ($12,500) will cost $1,666 per month, including PMI.
You can lower your mortgage rate and your payments by paying one or two discount points. One discount point brings down your rate by about 0.25 percent on average. For example, on a $350,000 purchase with a down payment of 5 percent ($17,500), paying one point ($3,325) would lower the rate from 4.875 to 4.625 percent and reduce the monthly payment from $1,760 to $1,710. Applying the extra $3,325 to the down payment instead would generate a payment of $1,741.
Switch Loan Products
Many buyers opt for an FHA mortgage because of the 3.5 percent down payment requirement, but FHA mortgage insurance is higher than PMI. If you come up with another 1.5 percent for a 5 percent down conventional loan, your monthly payments could be much lower. A $350,000 purchase with an FHA loan at an interest rate of 4.125 percent will cost $2,482 per month including principal, interest, taxes, insurance and mortgage insurance. With a 5 percent down payment and a conventional loan interest rate of 4.875 percent, the monthly payment will be $2,357.
Interest rates on 15-year mortgages are lower than 30-year mortgages, but few first-time buyers can afford the higher payments. A better choice, particularly for buyers who don’t intend to stay in their home for long, would be a 5/1, 7/1 or 10/1 ARM, which have a lower interest rate than a fixed-rate loan, lenders say. For example, the payment on a $250,000, 30-year loan at 4.5 percent (5 percent down) would be $1,666 and $1,529 on a 5/1 ARM at 3.5 percent.
If you can’t afford to buy what you want, look for a home in a different neighborhood or downsize to a less expensive home. Another option is to look at places that need a little work. You need to make sure the price makes sense with the condition. A home that has a newer roof and windows but needs a fresh coat of paint can be a good buy.