Some home buyers are facing ‘payment shock’. ways to save on mortgage

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also with Signs that the housing market is cooling downHome buyers are still feeling the brunt of higher prices and higher interest rates.

The average rate on a 30-year fixed-rate mortgage is 6.7% As of Friday, up from 3.3% in early 2022, according to Mortgage News Daily. Plus, home prices — an average of $435,000 — are up. 13.1% On average, compared to a year ago, according to Realtor.com.

“I think the big problem is the payment shock,” said Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit with customers and the rate is in 6s, their payment is sometimes outrageous.”

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the difference is Rate of interest Creating can be important. For example: on a mortgage of $300,000 at 6.5% over 30 years, the monthly payment for principal and interest would be only $1,896. The same loan at 3% would result in a payment of $1,264 (savings of $632 monthly). Other fees such as property taxes or mortgage insurance would be on top of those monthly amounts.

Yet there are ways to reduce the cost of buying a home. While there is no one-size-fits-all approach, you can evaluate the various options available to you and consider whether any of them make sense for your situation.

Here are some options.

An ARM Could Be a Short-Term Answer

One adjustable rate mortgage Might be worth considering. With an ARM, as it is called, the appeal is its lower introductory rate compared to a traditional fixed rate mortgage.

This rate is fixed for a set amount of time – say, seven years – and then it goes up, down, or the same depending on interest rates over that time.

While there’s a limit to how much the rate can change, experts recommend making sure you’re going to be able to afford the maximum rate if you encounter it down the road. As shown above, a few percentage points can make a big difference in monthly payments.

Median home value as a percentage of income is up 46% since the start of the pandemic

However, keep in mind that at any time before the rate is adjusted, you may be able to refinance your mortgage, Rinaldi said.

or, if you anticipate moving ahead before the end of the introductory rate period, An ARM can make sense, However, because life happens and future economic conditions are impossible to predict, it is wise to consider the possibility that you will not be able to move or sell.

Additionally, if the ARM rate is not much lower than a certain rate, the savings may not be worth the uncertainty. Rinaldi said that while some lenders aren’t offering much in the way of a discounted rate, they are getting some that are about a percentage point or less.

15-year mortgages reduce the amount you pay in interest

While the typical mortgage is for 30 years, a shorter loan with a more favorable rate may be attractive. According to Mortgage News Daily, the average rate of 15-year loans as of Friday is 6%. Additionally, you save a burden in interest over the life of the loan and you build equity in the home faster.

For example: A 30-year, $300,000 mortgage with a fixed 6.5% rate would mean paying $382,786 in interest over the life of the loan. In comparison, a 15-year mortgage, even at the same rate, would translate into paying $170,438 in interest over the course of the loan.

It is not just the rate difference, but also the equity buildup.

David Deming

President of Deming Financial Services

“It’s not just the rate difference, but the equity buildup as well,” said certified financial planner David Deming, president of Deming Financial Services in Aurora, Ohio.

Plus, he said, if overpaying squeezes your budget too much, it may not be the best route.

First-time home buying programs can help with costs

If you are a first time home buyer with limited means, you may be able to qualify for one of these federal program Available which helps you to buy a home with low down payment and low closing cost. apart from this, State and local governments (city or county) often offer grants or no-interest loans to help buyers cover their downpayment and closing costs.

own work in some cases

Sometimes, a potential homebuyer may be unable to qualify for a mortgage immediately due to credit issues or a short work history. Or, they may need more time to save for the down payment, but they want to live in a house and stay there.

In those cases, it makes sense to consider a lease—or rental contract, A common aspect of these arrangements is for a portion of the monthly rent to go into an escrow account until the purchase date is reached a few years or so down the road, at which point your escrow amount will go into the closing cost or down. Goes to payment. But if you leave or otherwise cannot fulfill their contractual obligation, the money is forfeited.

If you consider going this route, it’s important to do your due diligence and make sure you understand the terms of the contract — including the type of mortgage eligible for the property and how the purchase price will be determined, Deming said.

Buying ‘points’, reducing closing costs can also save

You may be able to negotiate closing costs, such as the fees you pay for various aspects of the home-buying process or by using a low-cost title company. Or, the seller may be willing to pay some of your costs based on competing offers submitted.

You can also buy additional “points” to get a lower interest rate – one point is 1% of the loan amount.

However, Rinaldi cautions that because it can take years to break even if you go this route, it may not be worth it.

“You don’t want to pay extra origination fees because if you refinance, that money is lost,” Rinaldi said.

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