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Learn ways to save on mortgage costs as rates for a 30-year fixed rate mortgage soars over 6%. Some homeowners may be surprised by their monthly mortgage payments when buying a house. Here are tips for saving.
With 30-year fixed mortgages hitting 6.7% for the first time since November 2008, homeowners are now faced with “payment shock.” Here are some tips to help them avoid financial disaster.
- Mortgage rates increased significantly during the first quarter of 2019.
- Home prices have been rising for the past few years but have recently slowed down.
- The combination of low-interest rates and high prices has made buying a house difficult.
Even though there are signs that the housing market has cooled off, buyers are still facing high prices and higher mortgage rates.
As of Friday, the national interest rate for mortgages was 4.5%, up from 2.9% at the beginning of 2020. On top of that, house values are up by 13.1% compared to last January.
“I think the biggest problem is payment shock,” says Stephen Rinaldi, President and CEO of Rinaldi Group Mortgage Brokers. “When I sit down with my client, and they see the rate, it’s often too high for them.”
The difference between interest rates is significant. Let us take an example: A $300,000 mortgage at 6.5%, over 30 years, results in a monthly payment of $1,896. At 3%, the payment would be $1,264 (saving $632 per month).
In addition to these costs, there may be tax implications if your state requires PITI. You should consult with a qualified financial professional before taking out a loan.
There are ways to lower home-buying costs, but they’re not always easy to implement. You may want to consider some of these options before making a final decision.
Here Are Some Ways to Save on Mortgage Costs
A Short-term Solution May Help You Get by for Now, But an ARM Won. Adjustable mortgages may be worth considering if you’re considering a house. They usually offer lower interest rates than regular mortgages.
That rate is fixed until a specific date (say, seven years), and then it adjusts up or down according to where the market is.
Experts suggest keeping the interest rate as low as possible without going below zero. A slight increase in the interest rate could result in an increased monthly payment.
At any time before the rate adjusts, keep in mind that you might be able to refi your mortgage.
If you expect to move during the initial interest-only payment term, an adjustable-interest mortgage (ARM) might make more financial and emotional sense than a fixed-interest loan.
Because life doesn’t always go according to plan, it’s wise to think ahead and prepare for the possibility that you won’t be able to move or even get rid of the property when the initial interest-only payments end.
The savings might not be worth the risk if the ARM rate isn’t significantly lower than a standard interest rate. Rinaldi said he’d found some lenders offering rates 1% or lower than a standard rate.
15-Year Mortgage Reduces What You Must Repay Each Month by Half
A shorter term usually has a lower interest rate than a longer one. For example, if you borrow $200,000 at 7%, you pay back $203,400 after seven payments. If you borrowed the same amount at 5%, you would pay back $201,500 after five payments.
You’d save almost $3,000 in interest for the year. And because you’re building equity faster, you could potentially sell your house for more when you eventually need to move.
For example, if you were to take out a 30-year, $100,000, at a 6.5% APR (annual percentage rates), then pay off the entire balance by year 20, you’d end up paying $102,812 in interest.
If you took out a 15-year, $100K, at the same 6.5%, then paid off the entire balance by the end of year 10, you’d be left owing $53,938 in interest.
“It’s not just the difference in interest rates, but the increase in stock value, too,” says certified financial planner Dave Demming.
On the one hand, he said, if you can afford it, then go for it. But it might not be the best option if it squeezes your budget too hard.
First-Timers Can Often Qualify for Assistance with Down Payments and Closing Costs
If you’re a new homeowner with limited resources, you might be eligible for government assistance to help pay for your down payment and mortgage interest. Additionally, cities and counties sometimes provide low-interest financing to help people purchase homes.
It May Be Worth Renting Instead of Buying
If you’re looking at purchasing a new home, you may not be able to afford one immediately because you don’t have enough cash saved up for a down payment. Or you may need more time to accumulate savings before buying a home.
If you’re considering a lease- or rent‑to‑own arrangement, one thing to keep in mind is that a large part of the monthly rental fee will be held in escrow until you buy the property. However, if you don’t fulfill the terms of the agreement, the escrowed funds will be returned to the landlord.
If you’re considering buying a house, it’s essential to do some research before signing any contracts. You need to know precisely what you’re getting into.
Save Money by Buying ‘Point’ Cards Instead of Paying for Items at Checkout
You might negotiate lower costs associated with buying a house, including the cost of paying for various parts of the homebuilding experience, or you might be able to get the seller to cover part of these costs.
You might be able to pay for extra points to get a lower APR. However, Rinaldo warns that it might not be worth it because it takes years to break even when going this route. “You don’t want to lose money by paying additional origination fees.”