Home News Some homebuyers are facing ‘payment shock.’ Ways to save on a mortgage

Some homebuyers are facing ‘payment shock.’ Ways to save on a mortgage

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but Signs of a cooling housing markethome buyers are still plagued by rising prices and rising interest rates.

The average interest rate for a 30-year fixed-rate mortgage is 6.7% As of Friday, it is up from 3.3% at the beginning of 2022, according to Mortgage News Daily. In addition, home prices (median $435,000) are rising. 13.1% According to Realtor.com, average from a year ago.

“I think the main problem is payment shock,” said Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker based near Philadelphia. For coins, their payments can be exorbitant.”

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The difference is degree of interest make can be important. As an example, a $300,000 home loan at 6.5% over 30 years would have monthly payments of $1,896 for principal and interest only. Paying the same loan at 3% would result in a payment of $1,264 (a monthly savings of $632). Other costs such as property taxes and mortgage insurance are added to these monthly amounts.

However, there are ways to reduce the cost of buying a home. There is no one-size-fits-all approach, but you can evaluate the various options available and consider whether any of them are suitable for your situation.

Here are some options.

ARM could be the short-term answer

Ann variable rate mortgage Might be worth considering. The attraction of so-called ARMs is the lower initial interest rate compared to traditional fixed rate mortgages.

The interest rate is fixed for a period of time (for example, seven years) and then adjusted up or down or remains the same, depending on the interest rate at that time.

There is a limit to how far you can float, but experts recommend making sure you can afford to pay the maximum charges if you face them in the future. As shown above, a few percentage points can make a big difference to your monthly payout.

Remember, however, that you may be able to refinance your mortgage at any time before interest rates adjust.

Or, if you anticipate moving before the initial fee period ends, ARM might make senseHowever, life happens and it’s impossible to predict future financial conditions, so it’s wise to consider the possibility that you won’t be able to move or sell.

Additionally, if the ARM rate is not significantly lower than the fixed rate, the savings may not be worth the uncertainty. Rinaldi said some lenders don’t offer many discount rates, but he finds them about 1 percentage point or lower.

Pay less interest with a 15-year mortgage

A typical mortgage is 30 years, but a shorter term loan with a more favorable interest rate may be attractive. The average interest rate for a 15-year loan was 6% as of Friday, according to Mortgage News Daily. Plus, you can save interest over the life of the loan and build your home equity faster.

As an example, a 30-year $300,000 home loan with a fixed interest rate of 6.5% means you will pay $382,786 in interest over the life of the loan. By comparison, a 15-year mortgage, with the same interest rate, would pay $170,438 in interest over the life of the loan.

It’s not just interest rate differentials, it’s also stock stacks.

David Deming

President, Deming Financial Services

“It’s not just interest rate differentials that are having an impact, but stock build-up,” said David Deming, president of Deming Financial Services in Aurora, Ohio and a certified financial planner.

At the same time, if a higher payment puts too much strain on your budget, it may not be the best option.

First-time homebuyer programs can save you money

If you are a first-time homebuyer with limited means, you may qualify for one of the following: federal programs Help you buy a home with a lower down payment and reduced closing costs. moreover, state and local government The (city or county) often offers subsidies or interest-free loans to help buyers cover the down payment and closing costs.

Rent works in some cases

In some cases, potential homebuyers may not be able to qualify for a mortgage right away because of credit issues or a short work history. No, but you might want to go home and live at home.

In such cases, it makes sense to consider leasing or leasing. lease agreementOne common aspect of these arrangements is to put a portion of each month’s rent into an escrow account until the date of purchase, years or years later. However, if you walk away or fail to meet your contractual obligations, the money will be forfeited.

If considering this option, it is important to do your due diligence and make sure you understand the terms of the agreement, such as the type of mortgage the property is eligible for and how the purchase price is set.

You can also save by purchasing “points” and reducing closing costs

You may be able to negotiate closing costs, including fees you pay for various aspects of the home buying process and using a low-cost title company. Alternatively, the seller may be willing to pay a portion of your costs, depending on the competing offers presented.

You can also purchase additional ‘points’ — 1 point equals 1% of the loan amount — to get a lower interest rate.

But Rinaldi warns that it may not be worth it, as it can take years to break even if you go this route.

“You don’t want to pay an extra origination fee because you lose money when you refinance,” Rinaldi said.

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