It’s a tough time to buy a home. Interest rates have risen more than 100 percent in the past year. If you already own a home and have no reason to move, this is probably not the time to refinance–you’re almost certainly better off sticking with the mortgage you already have.
But what if you, or your employees, need to move and you must apply for a mortgage because you have no other choice? Be prepared to be patient. Mortgage professionals report that interest rates and loan requirements are changing so quickly that you could qualify for a loan one day and not qualify the next. And if you do get a loan, will you be able to make your mortgage payment every month? Is there anything you can do to make those payments more affordable?
The answer is yes–but with some potential drawbacks. You may only be able to lower your interest rate temporarily. You may need to ask the seller to pay for your lower rate, which they may not be willing to do. Worst of all, you could put yourself at financial risk if your payments go up to a level you can’t afford, and home prices fall, meaning you won’t be able to sell the house at a high enough price to pay off your mortgage.
Here’s a look at what some lenders are offering to lessen the pain of higher interest rates, and whether it’s a good idea to take them up on it.
1. Pay points.
Paying points is not a new idea, although it fell out of favor during the days of low interest rates. As interest rates creep toward 7 percent and maybe beyond, it may be time to give points another look. Points are an upfront fee you pay to the bank to lower your interest rate. Typically, a point costs 1 percent of your total mortgage, and lowers your interest rate by 1 percent. (Points can come in fractions too.) Points are typically part of the mortgage offer a lender makes.
Why you might want to pay points: Points are the only way to lower your interest rate permanently instead of temporarily. You need your monthly mortgage payments to be sustainable, and if you can afford to pay a lump sum up front to achieve that, it might be worth it.
Why you might not: Paying points might not make sense depending on how long you have the mortgage. If you plan to pay it off as soon as your old home sells, for instance, points will likely cost more than they’ll save you. The same is probably true if you only stay in your new home for a couple of years. In those cases you might be better off using the money you would have spent on points to make a bigger downpayment, lessening your debt overall, or on improvements that increase the value of the home.
Smart move: Use a mortgage calculator to determine what your monthly payments would be with and without points. Then figure out how many months it would take for your total savings to equal what you spent on the points. Ask yourself how likely it is that you’ll be paying the mortgage for that long. Your answer should tell you whether points are a good idea or not.
2. Ask the seller for a temporary interest rate buydown.
Temporary interest rate buydowns, are, in effect, a temporary version of points, where someone pays a lump sum upfront. That money goes into escrow, and is used to pay part of the mortgage every month, thus effectively lowering the interest rate by a percentage point or two for the first year or two years. You can pay this money upfront yourself, but depending on circumstances, the home’s seller or their real estate agent might pay it as a way to get the deal closed. Or the lender might even pay it.
Why you might want a temporary interest rate buydown: Since the money that goes into escrow is equal to the money you’ll save by lowering your interest rate, it doesn’t make sense for most buyers to pay for the buydown themselves. On the other hand, if the seller, agent, or lender is willing to pay for the buydown, it basically amounts to found money. And having lower mortgage payments for the first year or two could be handy if you know you’ll be spending a lot of money on improvements or repairs when you first move in.
Why you might not: Humans have a bad habit of putting problems off and believing we’ll be able to deal with them in the future, particularly when it comes to money. It’s how people get into trouble with credit card debt, for example. If you can’t afford those higher mortgage payments today, chances are you won’t be able to a year from now, either.
Smart move: Sellers and agents usually offer a temporary buydown when they’re having trouble selling a home. So it’s smart to do a little digging and find out why. Is the home overpriced? Is there a problem with it that you may have overlooked?
3. Get an adjustable-rate mortgage, or ARM.
Most people opted for fixed-rate mortgages when rates were low, but ARMs are becoming a bit more popular now that interest rates are higher.
Why you might want an ARM: ARM starting interest rates are usually lower than fixed-rate interest rates. And some lenders will commit to that initial rate for a long period of time, such as five to ten years. If so, an ARM might make sense, especially if you don’t plan to stay in the home for very long.
Why you might not: There’s a heads-I-win-tails-you-lose aspect to ARMs. If interest rates rise, your payments will go up. If interest rates fall, then the ARM won’t matter because you’ll refinance to a fixed rate as soon as you can. So if you do consider an ARM, you should probably think of it as a very temporary arrangement. Keep in mind that it comes with a lot of risk.
Smart move: If you do consider an ARM, try to get the longest guarantee you can for that initial, lower rate. Then keep a close eye on the financial news and your local lenders’ advertised interest rates. Plan to refinance at an acceptable fixed rate as soon as you can.
There’s a growing audience of Inc.com readers who receive a daily text from me with a self-care or motivational micro-challenge or tip. Often they text me back and we wind up in a conversation. (Want to learn more? Here’s some information and a special invitation to an extended free trial.) Many are entrepreneurs or business leaders and they tell me that keeping a handle on their own finances is essential for their business success and their own peace of mind. Making sure your mortgage payments are within your means is a good place to start.
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