STRATEGIES FOR MORTGAGE SAVINGS AMID RISING INTEREST RATE
In the context of mortgage rates hovering around 7%, affordability remains a primary concern for homebuyers. Data from the National Association of REALTORS® indicates that 60% of U.S. cities witnessed an increase in home prices in the most recent quarter. Consequently, a typical single-family home’s median monthly mortgage payment is now $2,234. Despite this challenging landscape, several strategies can help prospective buyers minimize their mortgage expenses.
Comparative Rate Shopping
Securing multiple mortgage rate quotes can yield significant long-term savings. According to a study by LendingTree, a borrower could save an average of $84,301 over the loan’s lifespan by comparing rates from different lenders. The savings can average $2,810 annually and $234 monthly. “Different lenders can offer substantially different rates to the same individuals,” notes Jacob Channel, LendingTree’s senior economist.
Brandon Snow, executive director of Ally Home, advises borrowers to evaluate interest rates, terms, and additional fees when comparing offers. Prospective borrowers should consider gathering quotes from various institutions, including mortgage bankers, regional and national banks, and credit unions.
Rate and Fee Negotiation
Though 63% of buyers have negotiated home prices, only 39% have attempted to negotiate mortgage rates. However, an independent study from LendingTree suggests that 80% of those who did negotiate successfully lowered their rates. Snow emphasizes the value of using quotes from competitive lenders as leverage in negotiation discussions.
Points Purchase for Rate Reduction
Buying mortgage points in increments of 0.25 can reduce the loan’s interest rate, albeit at a higher initial closing cost. Financial experts recommend calculating the break-even point to determine if long-term savings will offset the upfront cost. Oftentimes, negotiations with a seller can result in the seller contributing towards buying down the buyer’s mortgage at closing. Bankrate uses the following example of how this might work: A borrower has a 7% mortgage rate on a $320,000 loan, with a monthly payment of $2,129. The borrower purchases points to get the mortgage rate to 6.5%. That costs him or her $6,400 at closing and lowers the monthly mortgage payment to $2,022—a $107 difference.
Leverage Existing Relationship
Current customers may be eligible for “relationship discounts” from their lenders. For example, Chase Bank may waive loan processing fees for customers with existing accounts, while U.S. Bank offers up to $1,000 off closing costs for account holders.
Monitor ‘Float-Down’ Policies
Borrowers should inquire about float-down policies that allow rate adjustments if market rates change significantly during the loan process. Being proactive can protect buyers from paying higher rates than necessary.
Evaluate Loan Terms
Though 30-year fixed-rate mortgages are standard, some lenders offer longer terms like 40-year options. Extending the loan term can reduce monthly payments but will increase the total interest paid over the life of the loan. Adjustable-rate mortgages (ARMs), offering lower initial interest rates, have also been gaining traction as a cost-saving measure.
THE BOTTOM LINE
The real estate mantra, “Marry the house; date the rate,” suggests that long-term commitment to a property might outweigh the immediate benefit of a low-interest rate. Buyers should consider the home’s long-term value and the potential for refinancing should rates decrease in the future.
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