Comparing Money-Saving Mortgages

For most people buying a home is perhaps the largest single investment they will ever make. Accordingly, they tend to be cautious, more selective, and better informed before they buy. That’s why the stability of the fixed-rate mortgages has long been the most popular.

Borrowers can lock in the amount of their monthly mortgage payments (minus taxes, insurance, and homeowner’s association fees) for the duration of their loans and avoid the risk of rising interest rates. But now, with rising interest rates and higher home prices, many buyers are finding they can no longer afford their “dream home” with a fixed-rate mortgage and are looking for more affordable options: adjustable-rate mortgages, interest-only mortgages, 2-1 buydowns.

Some of these loan programs start off with a few years of cheaper monthly mortgage payments but carry the risk of a rising interest rate. Most variable rate loans have caps on how high a borrower’s future payments can rise. And if mortgage interest rates fall, as expected over the next few years, borrowers could wind up saving money by choosing one of these loans. So, what do today’s homebuyers need to know when choosing a mortgage?

 Shop Around For a Mortgage

Good research could save you thousands of dollars a year and make your “dream home” affordable. Fewer home buyers in the market have made lenders more competitive. Mortgage rates and fees can vary substantially from lender to lender. Start with your bank. If you have a high credit score and are prepared to make a large down payment, attempt to negotiate a lower interest rate and waived fees. Then shop around. Many lenders will match or beat what their competition is offering.

Reverse Mortgages

This useful loan option is designed to help homeowners and home buyers aged 62 and older convert some of their home equity into cash. So they can live more comfortably with greater financial independence. Built into this financial tool are several features and safeguards for your security and peace-of-mine: Read More

Adjustable-Rate Mortgages

Adjustable-rate mortgages, or ARMs, have gotten a bit of a bad rap over the years as the interest rates on the loans are constantly changing. However, borrowers on tight budgets can save some money with these loans, at least initially.

The most common is the 5/1 ARM, although borrowers can also choose a seven- or ten-year ARM. You typically receive a lower mortgage rate for the initial years of the loan, making ARMs popular right now because of higher rates. For a 5/1 ARM, the mortgage rate is fixed for the first five years, then it adjusts annually to the current rates.

The bet is that the rate goes down within five years. The risk is that the rate after five years is higher. The good news is there is usually a cap placed on how much higher rates can rise per year and over the life of the loan. 

 Interest-Only Loans

Interest-only loans have also been gaining in popularity as buyers look for ways to save money. For the first three, five, or ten years of a typical interest-only loan, borrowers pay only the interest on the loan. Then they spend the next 20 or even 30 years paying off the balance of the loan, which is structured as an ARM. Since you pay only interest in the beginning, the mortgage rate tends to be high and the monthly payment low. Once the interest-only period ends the monthly payment can rise significantly.

These loans are generally best for the wealthy who are buying multi-million-dollar homes, investors planning to flip the property, or professionals who may not have a large down payment but expect their income to rise substantially over the coming years. The mortgage rate on this type of loan is usually higher making it harder for borrowers to qualify. You’re not paying principle, so you’re not building equity in the home unless its market value appreciates. 

Buy Mortgage Points to Lower Your Interest Rate

Before you splurge on points, think about how long you plan to stay in your home. If you plan to age in place in the home and have the extra cash, it might be a good option. If you don’t expect to be there long, it may not make financial sense.

Have Seller Buy Down the Interest Rate

Earlier this year buyers were paying over the list price, waiving finance contingencies and home inspections. Now, with the rise in interest rates driving demand down, sellers are more often willing to buy down the buyer’s interest rate.

The most popular buydown is the 2-1. It lowers the borrower’s mortgage rate during the first year by 2 percentage points below the then current rate. During the second year, the rate lowers by 1 percentage point. Then it resets to whatever the rate was when the loan became effective. In this current market, sellers are often willing to buydown the buyer’s interest rate to avoid lower the list price.

Consider a VA Loan

If you’re eligible for a U.S. Department of Veterans Affairs loan, this may be the cheapest mortgage you can find. Fixed- or adjustable-rate loans don’t require a down payment or private mortgage insurance. They also typically offer cheaper closing costs and lower mortgage rates than fixed-rate and other loans.

Get Comfortable with a Reverse Mortgage

Contributors: Realtor.Com; Veterans United; Academy Mortgage

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