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We are living in interesting (totally pun intended) times, as far as interest rates go. As we all know the Federal Reserve has been on an all-out attack against inflation, and it finally looks like they are making some headway. Like anything, there are positives and negatives to this decision. On the positive side, my cash is earning 3.5%! One of the major negatives is the impact this has on mortgage rates.
If you look at today’s average 30yr mortgage rate, we are talking somewhere in the 6.25% rate. Now granted if you are a Baby Boomer you remember your first mortgage was somewhere close to 18%. For those, 6.25% still likely feels like “free money.” That said it has been a while since we’ve been stuck with the reality of a 6-plus percent mortgage rate.
Now, the obvious comment is simply don’t buy a house during these times, but we all know that is unreasonable. People get transferred, retire, have babies, outgrow their homes, and quite frankly if this continues the natural effect is housing prices begin to come down. This is all a longwinded way of saying the world goes round and so does our need to purchase homes.
Thus, the question at hand is how does one approach this lending environment in the most economical way possible from a financial planning perspective? Wish I knew the answer…. Just kidding as I have a few thoughts on the manner.
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I heard this the other day from an industry expert I respect. I had been giving this advice but lacked the cool lingo to go with it, so thank you for making me cool. As a matter of fact, his whole saying was, “love the house, date the rate.” In essence, what he is saying is to be smart with the mortgage. This naturally bodes the question of how we can work smarter, not harder.
To answer this question let’s take a look at mortgage rates a little closer.
This was sent to me a few days ago but tells you all you need to know. You can see a 30yr fixed is at 6.25% or $493 per $100,000 of loan. If you are looking to still buy that same priced house, but realize it is harder to afford today than a year ago due to interest rates, well, date the rate.
What I’ve been recommending is to do some sort of ARM, going under the belief that interest rates will come down during the fixed portion of the term. As you can see doing a seven or five-year arm brings the interest rate down to 5.125% and 4.875%. This can save you $60-$70 a month alone. The win here is you get into the house of your dreams for less, knowing that you’ll refinance out of it assuming rates drop.
I am a huge fan of this philosophy as I believe over the next five, and very likely seven years, you’ll have an opportunity to refinance at a more appealing rate. All while paying down some principal and minimizing the pain if you will.
The way these mortgages work is typically you pay a fixed rate on a 30-year amortization for the ARM term, let’s say seven years. Then the rate adjusts annually or semi-annually based on current mortgage rates. Now don’t get me wrong there is some level of risk if you think, or in actuality, mortgage rates don’t get any lower during the ARM term. That said it is a calculated risk I am comfortable taking and advising on during this environment.
Other Mortgage Options
These are only some of the examples of unique ways to lower your cost of the mortgage during a higher interest rate environment. I’ve seen all sorts of new and innovative mortgage products coming out to help ease the pain of the borrower. The point is don’t look at a 30yr mortgage rate and assume that is what you are stuck paying. There are options and creative ways to date the rate that all lead to lesser out-of-pocket expenses for you the borrower.
In conclusion, don’t let the initial sticker shock of interest rates completely thwart your ability or want to make a move. There are a lot of factors to be considered and when it comes to financing a lot of options outside of traditional thinking. Remember we have some great lending partners that can help you assess what is the right decision and options for you.
As always stay wealthy, healthy, and happy everyone.
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