Tips for Home Buying Amid Rising Mortgage Interest Rates
Skyrocketing Mortgage Interest Rates
Purchasing a home during an affordability crisis, exacerbated by skyrocketing mortgage interest rates, requires creative alternatives. Here you will find some tips to break through the barriers to homeownership posed by rising interest rates and dwindling savings accounts.
The average rate on a 30-year fixed mortgage was at 3.41% in the first week of January 2022 and has skyrocketed to 7.8% in the first week of November. Using Credit Karma's amortization calculator, we can see that a $350k 30-year fixed loan at a 3.41% interest rate would amount to a $1,554 monthly payment with $209,485 in interest paid over the life of the loan. At a 7.8% interest rate, the same loan would carry $2,520 monthly payments with $557,036 interest paid over the life of the loan.
Given our lack of home affordability, it is no wonder that Fannie Mae's Home Purchase Sentiment Index has reached an all-time low since its inception in 2011. Only 16% of consumers in October reported that now is a good time to purchase a home.
We can't blame consumers for their dismal outlook on home purchasing, but some renters are not in the position to put their home purchases on hold until the market improves. A July 2022 Freddie Mac Survey reported that nearly 60% of U.S. tenants faced a rent increase in the last year, with about a third of rent hikes amounting to 10% or more. The Washington Post describes Miami as the "center of America's rental housing crises," pointing out that "Rents in South Florida rose 24.61 percent between July 2021 and July 2022, to an average of $2,841, which works out to $34,092 over a year. RentCafe found that 97.6 percent of apartments in Miami-Dade County are occupied, and every vacant one has 31 prospective renters competing for it."
If you're considering purchasing a home in the near future, it's important that you explore all your options. Rate buydowns, adjustable-rate mortgages, assumable mortgages, and first-time homebuyer programs are worth looking into to work around high mortgage interest rates during our home affordability crises.
One way to work around rising mortgage interest rates is to pay discount points at closing. Discount points allow you to prepay interest on your mortgage in order to lower your monthly payments. Each discount point is equal to 1% of the loan amount, but the reduction on interest for each point varies by lender so be sure you understand each lender's discount point calculation while shopping for a mortgage. Keep in mind that it takes around five to ten years to recoup the upfront payment on discount points, so this is only a good option if you plan on keeping the loan for an extended period of time.
If you're not planning on holding the loan for long, temporary rate buydowns are probably a better option. Temporary rate buydowns will allow you to pay a lower interest rate over the first year or two of the loan period. When the buydown period expires, your monthly payments will increase to cover the full rate in your mortgage contract. You can also consider refinancing when rates fall in the future.
The 1-0 buydown will decrease your interest rate by 1% during the first year. While the 2-1 buydown will knock 2% off of your interest rate for the first year and 1% in the second year. The upfront buydown payment at closing is placed into escrow and is distributed to the lender each month to make up the difference in interest payments. Rocket Mortgage helps us make sense of temporary interest rate buydowns in a November 2022 article,
"Let’s do a 1-0 buydown on a $400,000 30-year fixed with a permanent interest rate of 6.5%. The first year of your loan you save $257.12 on your monthly payment at a 5.5% interest rate. Finally, the interest rate becomes fixed at 6.5% with a monthly payment of $2,528.28 in the second year.
Not only is your payment lowered, but in this scenario, you save $3,085.44 in interest over the first year of the loan."
Buyers need to be aware that they have more leverage now as we shift away from a strong sellers' market. As homes sit on the market for longer periods of time, sellers will become more willing to provide concessions to entice buyers. It doesn't hurt to request seller-financed rate buydowns during home purchasing negotiations.
According to National Mortgage News, mortgage applications are at a 25-year low. With loan applications down, lenders may also be willing to include a temporary rate buydown to earn your business.
One way to avoid the prevailing mortgage interest rates is to assume the seller's existing mortgage rather than applying for a new loan. This would allow you to assume the seller's interest rate, repayment period, monthly payment amount, and principal balance. Of course, you will need to cover the seller's equity in the down payment or with a second mortgage.
Government-backed loans such as FHA, VA, or USDA are usually assumable but most conventional loans are not. In order to determine if a conventional loan is assumable, the seller would need to see if there is an assumption clause in their mortgage contract.
Assumable mortgages were fairly popular in the late 1970s and early 1980s, but have become very rare aside from cases of inheritance or divorce. Therefore, most real estate professionals today lack a working knowledge of assumable mortgages. If you decide to go this route, you will need to have the seller verify that their mortgage is assumable and then you will need to reach out to their loan servicer for guidance with the application process. You won't have the opportunity to shop around for a mortgage because you will have to go through the seller's lender. Be sure you have been pre-approved for a mortgage beforehand so you can compare the rate and terms to the assumable mortgage.
Adjustable Rate Mortgages (ARM)
According to an October CNBC article, just under 12% of home finance applications were adjustable-rate mortgages in September. This may not seem very significant, but the percentage of adjustable-rate mortgages has been under 3% of total mortgages for years. In fact, applications for adjustable-rate mortgages are at a 15-year high.
However, ARMs do pose a serious risk to the borrower. It's true that ARMs can produce savings during the fixed-rate period, ranging from six months to ten years, but if interest rates are high when your fixed-rate period expires, you could face a significant increase in your monthly payments that could break your budget. If you opt for an ARM, pay close attention to the loan's cap, which is the maximum amount that the rate can rise after the fixed-rate period expires.
Normally the interest rate is lower for ARMs than for fixed-rate loans, but this is not always the case. You will need to speak with a loan officer for an accurate rate comparison.
Florida First-Time Homebuyer Programs
If you're able to afford monthly payments despite rising mortgage interest rates, but you don't have sufficient savings to cover the down payment and closing costs, a Florida first-time homebuyer program may help you achieve homeownership.
Even if you've owned a home in the past, you might still qualify for a first-time homebuyer program. Buyers that haven't owned a home in the past three years, single parents, displaced homemakers that were on title with a former spouse, and previous mobile homeowners may qualify.
Florida offers four types of down payment assistance:
- Grants: Grants are not repaid.
- Second Mortgage: Repaid with monthly payments. The interest rates and terms are set by the organization issuing the loan.
- Deferred Loan: Repayment is not due until the homeowner sells the property or refinances their mortgage.
- Forgivable Loan: The loan does not need to be repaid if you own the home for a specified period of time.
In order to qualify, you'll need a credit score of 640 or higher and you must fall under the maximum income limits that vary by county and family size. If you're opting for a forgivable loan, pay close attention to the amount of time that you must own the home to avoid repayment. Let's take a closer look at Florida's Down Payment Assistance Programs:
The Florida Assist
- Up to $10,000
- No interest second mortgage
- Repayment is deferred until the homeowner sells or transfers the property, refinances, pays the first mortgage in full, or ceases to occupy the residence.
The Florida Homeownership Loan Program (FL HLP)
- Up to $10,000
- Second mortgage:15-year term with a 3% interest rate
- Paid back monthly - payments are usually factored into the borrower's debt-to-income ratio when qualifying for their primary mortgage.
- The unpaid principal balance must be paid in full when the homeowner sells or transfers the property, refinances, pays the first mortgage in full, or ceases to occupy the residence.
HFA Preferred and HFA Advantage PLUS Second Mortgage
- 3% to 5% of the total loan amount
- No interest second mortgage
- Forgiven at 20% per year over its 5-year term when used with Florida Housing’s conventional HFA Preferred for TBA or HFA Advantage for TBA first mortgage products.
Visit Florida Housing's Loan Program Wizard for detailed information on downpayment assistance programs.
So it's not a good time to buy a home, but it isn't a good time to rent either, and it's never a good time to be homeless! If you're not in the position to wait the market out, remember that you have more leverage to negotiate with sellers now that we are in a more balanced market. You will need to explore all your options including rate buydowns, assumable mortgages, adjustable-rate mortgages, and first-time homebuyer assistance programs.
Rates are way up, but it's important to remember that the rates taking over the headlines are averages. You have to get pre-approved for a mortgage to determine what your personalized rate would be. Lenders will consider your credit score, loan-to-value ratio, debt-to-income ratio, down payment amount, loan amount, and the type of loan when setting your personalized mortgage interest rate. If you're considering purchasing, you need to shop around for a mortgage to ensure you get the best rate and terms. You have a 45-day period to shop as many lenders as you would like. All of the credit checks from multiple lenders during this timeframe will be counted as one inquiry.
David Rosa, with Renaissance Home Loans, is Real-ativity's trusted mortgage broker. Mortgage Brokers are a great place to start your home-buying journey because they are able to help you shop multiple lenders to find the best rate and terms. David offers over 20 years of experience coupled with a passion for creative lending solutions. Contact David today for an honest evaluation of your buying power in this difficult market.
Renaissance Home Loans
Mobile: (305) 725-7166