Interest rates are getting the best of us these days, it seems. The mortgage scenario of a year ago is a total budget blowout now. Homebuyers could use some ideas on how turn the tables on mortgage rates where possible. While nobody will be partying like it’s 2021, I have a few ideas. I have been around a while, and these almost seem like blasts from the past given the low rates of the past few years. But discount points, adjustable rate mortgages, and now the coming increase in conforming loan limits are all potential paths to lower a mortgage payment. (I also have a credit reporting insight at the end of the article for current renters.)
Paying a lender to lower the rate? Sounds painful. However, it could make sense now that mortgage rates are higher. A point is simply one percent (1%) of the loan amount. On a $400,000 loan, for example, paying one discount point to buy down the interest rate would cost $4,000.
Four thousand dollars is not nothing. So, why do it?
Because it can lower the interest rate by .375% to .5%, saving hundreds per year. On that same $400,000 loan, the discount point will be recouped in 2.5 years. Meanwhile, the lower payment is happening right now (and as long as one has the loan). Even better, sellers and builders can help pay closing costs, including discount points. Be sure to talk to a realtor about sellers concessions beforehand.
Adjustable rate mortgage (ARM)
ARMs typically have lower interest rates than fixed-rate loans, providing a more affordable option upfront. With the lower initial rate, one may be able to afford more house than with a fixed-rate loan.
The rate is fixed only for the initial term. Before entering into an ARM, a borrower should feel confident they can either meet the obligation, refinance, or sell the home before any reset. ARM rates adjust after the initial period agreed upon — generally 3, 5, 7, or 10 years. ARMs also have different caps, or limits, on the periodic rate changes. Knowing the adjustment caps can make a difference since most ARMs that are offered have caps of either 1, 2, or 5%. (Imagine your interest rate going up by 5% next month!)
Conforming loan limit
Increased buying power is rolling out this fall. Fannie Mae and Freddie Mac conforming loans generally have lower interest rates and are less difficult to qualify for, as opposed to jumbo loans for higher loan amounts. Kudos to Fannie Mae and Freddie Mac for keeping pace with home prices in high-cost areas.
The 2023 conforming loan limit was recently revealed at $715,000 for one-unit properties in the Washington, DC Area. A potential game-changer for some, mortgages at the increased limits are available now at some lenders, including EagleBank. Super-conforming loan limits will adjust, too, allowing even more borrowers to fit into non-jumbo categories.
Keeping an eye on the news for 2023 loan limits can help in planning for home purchase, especially for those who do not seek to go through jumbo loan underwriting.
Taking the sting out of mortgage rates is not a given. Not everyone will be able to buy down a rate or feel comfortable entering into an adjustable rate mortgage. Neither will everyone will be able to stretch their buying power with new limits on conforming loans. The DMV is a high-cost area to begin with. If someone is in a position to buy a home, chipping away at the rate is not a bad idea and may be accomplished by talking options with a lender.
Finally, for renters
For years, rental payments have not been included in the major credit bureaus’ scoring model. This is a problem. A lack of credit, or poor credit, can disqualify a borrower from obtaining a home loan or other type of loan. Landlords do not have to report rental history, which is a shame. However, it is possible through various subscription services.
Renters are hereby encouraged to check with their property managers to see if their building is enrolled in any of the reporting services. If not, individual rent-reporting services (for a fee) will also get some bureaus to reflect positive rental payments.
Maceo Clark (NMLS# 807001) has extensive experience in the mortgage industry as a community lender and loan originator. He is also a longtime volunteer youth soccer coach, so EagleBank’s partnership with DC United truly hits close to home. His goal as a lender is to provide the best mortgage options and achieve the highest levels of satisfaction for his customers. Maceo who can be reached at MClark@EagleBankCorp.com or 301-850-2655.
As a community bank, EagleBank offers knowledge of Home Buyer resources, as well as refinance services. Contact us at HomeLoans@EagleBankCorp.com.
This is not a commitment to lend. To be eligible, buyer must meet minimum down payment, underwriting and program guidelines. All loan applications are subject to credit and property approval. Property taxes, flood and/or property hazard insurance may be required. This information is for educational purposes only and is not to be taken as guidelines or guarantees to improve your credit or financial situation or eligibility to secure a home loan. EagleBank is an Equal Housing Lender. EagleBankCorp.com/mortgages (NMLS# 440513)