Strategies to Deal With Rising Mortgage Rates
Mortgage interest rates are on the rise. What does this mean for you?
Basically, if you’re planning to buy a house or refinance your current mortgage, you need to act sooner rather than later. Mortgage experts predict that interest rates will continue to increase in 2019, capping at around 5% by the end of the year.
Higher mortgage rates will make it more expensive to buy a home, and it can also limit purchasing power for some borrowers.
While this isn’t the best news, future predictions don’t have to deter your homeownership plans. You can’t do anything to prevent rising rates, but there are plenty of ways to soften the blow.
1. Put down a bigger down payment
A low down payment can put homeownership within your reach, and you’re able to keep more of your cash in reserves. But if rising mortgage rates result in a monthly payment that’s higher than what you’d like to pay, a larger down payment can help offset the effects of the higher rate.
This doesn't necessarily mean putting down 20%. But if you can afford to put down a little more — perhaps 10% or 15% of the purchase price — you’ll finance a lower amount and pay less each month.
2. Pay discount points
There's also the option of paying discount points to buy down your mortgage rate. Each discount point costs roughly 1% of the loan balance and can reduce your mortgage rate by about .25%.
Let’s say you get a 30-year fixed-rate mortgage for $200,000 and pay three discount points to reduce your mortgage rate from 4.75% to 4%. This results in a monthly savings of about $90, and you’ll save about $32,000 in interest charges over the life of the mortgage loan.
Be mindful that discount points will increase your closing costs. In the above scenario, you’ll pay about an extra $6,000 in closing costs, so make sure you have enough cash in reserves.
Although discount points can save you money, you shouldn’t deplete your savings account for a home purchase. Keep some cash in the bank for emergencies.
3. Choose a conventional mortgage, rather than an FHA mortgage
Some people prefer an FHA home loan because these require a down payment of only 3.5% (standard conventional loans require a minimum 5% down).
Although FHA home loans require less down, these loans can be more expensive than conventional loans—primarily because you’ll pay more for mortgage insurance with an FHA loan.
If you’re able to come up with an additional 1.5% down to qualify for a conventional loan, you can offset the expense of a higher mortgage rate by choosing this program instead.
Not only will you save money with a cheaper mortgage insurance premium, there’s also the ability to eliminate mortgage insurance once your property has at least 20% equity.
With an FHA home loan, mortgage insurance lasts for the life of the loan (if you put down less than 10%).
4. Choose an adjustable-rate mortgage term
Another way to offset the cost of a higher mortgage rate is to choose an adjustable-rate mortgage instead of a fixed-rate mortgage.
Adjustable-rate mortgages (or ARMs) offer a fixed-rate for a specific length of time, followed by annual rate adjustments. There are different types of ARMs, such as a 5/1, 7/1 or 10/1.
With a 5/1 adjustable-rate mortgage, you would pay a fixed mortgage rate for the initial five years, and then your rate would reset every year thereafter. The good news is that ARMs typically start off with lower rates than a fixed-rate mortgage.
Be mindful that the rate with these loans can fluctuate significantly after the initial fixed-rate period, either rising or falling. Therefore, ARMs are more suitable for borrowers who only plan to live in their homes for a few short years.
Cheap mortgage rates are still available, but they might not be for long. Whether you’re buying or refinancing, now’s the time to take action. Give our loan experts at Cherry Creek Mortgage a call to start your application. The sooner you lock your mortgage rate, the less you’ll pay in interest.