As the Federal Reserve continues to boost interest rates in a bid to tamp down inflation, mortgage rates are growing at the fastest rate in two decades. Today, the average 30-year fixed rate is 7.37 percent, resulting in a 78 percent increase in the cost of a mortgage – adding hundreds or thousands of dollars to monthly payments.
Borrowers are choosing adjustable-rate mortgages and purchasing points to counter these growing expenses. Not every strategy works for every buyer, so be sure seek the guidance of a mortgage expert.
Consider an ARM
The low (sometimes 3%) interest rate on an ARM fluctuates over time depending on market conditions.
This resetting was what crushed insolvent borrowers during the 2008 housing meltdown, but these are not the same loans offered today. Homeowners now have extra protections.
Some are comparable to a hybrid fixed rate. After a rate-locking period of five, seven, or ten years, the rate then begins to fluctuate. The strategy behind selecting an ARM is to lock in a low rate during this period of Fed hikes, then refinance once rates stabilize before the end of the first five, seven, or ten-year term and without incurring prepayment penalties.
According to the Mortgage Bankers Association, applications for ARMs have already doubled in the previous three months.
Consider buying points, often known as "buying down the rate," "prepaid interest," or "discount points," if you have extra cash on hand or a closing credit. This is a potential strategy for purchasers who plan to stay in the home for a longer period of time and can afford to pay more up front.
Buying each point often reduces your mortgage's interest rate by up to 0.25 percent. One point is equal to one percent of the loan amount, or $1,000 for every $100,000 borrowed. Therefore, one point on a mortgage of $400,000 would cost $4,000. By paying a single, one-time payment, applicants who qualify can lower their monthly costs.