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Category: Interest Rates (Page 1 of 23)

Should You Buy Down Your Mortgage Interest Rate? | Pros and Cons

When interest rates are high, some borrowers may choose to buy down their interest rate to lower monthly payments and make their mortgage more affordable.

Buying down the interest rate means paying an extra upfront fee to get a lower rate and monthly payment. This is referred to as buying “mortgage points” or “discount points.”

When interest rates are low, on the other hand, few borrowers pay higher closing costs to get a discount.

But as mortgage rates rise, borrowers are more likely to weigh the pros and cons of buying points to reduce their rate. I’m linking to an article by Michele Lerner at The Mortgage Reports that explains this in depth…and I invite you to check it out.

Here are a few highlights and thoughts from her article…

Pros of Buying Down the Interest Rate

The biggest reason to buy down your interest rate is to get a lower rate on your mortgage loan, regardless of credit score.

Lower rates can save you money on both your monthly payments and total interest payments over the life of the loan.

In addition:

  • If your income is too low for you to qualify for the house you want, you may be able to afford the purchase price with a reduced interest rate and payment
  • If you can convince a home seller to pay discount points for you, buying down your interest rate may help you qualify for your mortgage loan
  • Since discount points represent prepaid mortgage interest, the cost is often tax-deductible (provided that you itemize your deductions). Ask a tax professional for more information

Cons of Buying Down the Interest Rate

The primary drawback when you buy down your mortgage interest rate is that it increases the upfront cost of buying a home.

Your monthly payments will be lower, but you need to “break even” for those saving to be worth it. That means you should plan to keep the home loan long enough that your total savings outweigh the upfront cost of buying points.

Buying mortgage points also ties up your liquid cash. You may have better uses for that money; for example, paying off high-interest credit card debt, making investments, or saving for future home improvements.

You may also want to use the cash to invest in assets other than real estate for diversification, to boost a college tuition fund, or to pad your retirement account.

Finally, if you’re making a down payment of less than 20% — or have less than 20% in home equity when refinancing — you’ll probably have to pay for private mortgage insurance (PMI) on a conventional loan. Thus, it could be best to use your cash for a larger down payment rather than buying points.

How Does a Mortgage Buydown Work?

Buying down your mortgage interest rate involves purchasing discount points (also known as “mortgage points”).

You’ll pay an upfront fee to the lender at closing in exchange for a lower rate over the life of the loan.

Most types of mortgage loans allow buyers to purchase discount points, including conventional, FHA, VA, and USDA loans.

The rate reduction per point depends on the mortgage lender and the type of loan. However, as a rule of thumb, a mortgage point costs 1% of your loan amount and lowers your rate by about 0.25%.

Let’s look at an example, using a $400,000 mortgage amount:

  • Original quote: $400,000 mortgage at 6.25%
  • One discount point costs $4,000
  • One point lowers the rate by 0.25% (from 6.25% to 6.00%)
  • Over 30 years at 6.25%, you’d pay $486,600 in total interest
  • Over 30 years at 6%, you’d pay only $463,300 in total interest
  • Extra upfront cost of buying points: $4,000
  • Savings from buying points: $23,300

The actual savings and interest rate reduction will vary depending on your loan and lender. Ask your loan officer to show you a few different quotes, with and without points, so you can understand how the potential cost and savings stack up.

Types of Mortgage Rate Buydowns

Mortgage rate buydowns come in a wide variety of options.

Here’s a summary of what you might find when you start shopping around for a mortgage rate reduction:

  • Permanent buydown: This buydown results in the interest rate being lowered by a certain percentage for the entire duration of the mortgage.
  • Temporary buydown: This buydowns typically results in a temporary reduction in the interest rate for a specified period, often the first few years of the mortgage term.
  • 3-2-1 buydown: This option involves a more gradual reduction in the interest rate over the initial three years of the loan, with each year representing a different interest rate tier (e.g., 3% lower in the first year, 2% in the second, and 1% in the third).
  • Seller contributions: In some cases, sellers may offer to contribute to the buyer’s closing costs, which can be used to fund a buydown.

In Conclusion

Mortgage rates have recently fallen from their 2023 peaks. However, they’re still much higher than a few years back so paying discount points can help you save.

To see what you qualify for, give me a call and we can go through multiple scenarios. I can show you rate quotes both with and without mortgage points so you know how much you could save on your rate — and what it would cost you!

If you’d like to find out more and discuss the pros and cons of discount points, don’t hesitate to reach out to me!

February Mortgage Rate Projections – Things Are Getting Better

Mortgage Rates have improved considerably from their peak in the high 7% range.

Their trajectory this year will be highly influenced by the path of inflation and the Federal Reserve’s actions.

After hiking rates at one of the fastest paces we have ever seen in history to help reduce very high inflation, the market is anticipating that the Fed will begin cutting rates and slow the reduction of their balance sheet.

These actions should help lower mortgage rates.

Inflation Watch

One of the most important items the Fed is watching is their preferred measure of inflation, Core Personal Consumption Expenditures (PCE), which will need to move confidently towards their 2% target.

The most recent inflation reading shows that Core inflation is at 2.9%, which is still above the Fed’s target. 

But the recent 6-month pace is trending at 1.85% on an annual basis and shows that inflation is heading where the Fed wants, it will likely just take some time.

The market is expecting that the Fed should start cutting rates at their May 1 meeting.  If this translates to lower mortgage rates, the additional home buying interest would most likely support home prices rising further.

Home Prices and Mortgage Rates

Housing prices in the US were surprisingly resilient last year in the face of a jump in mortgage rates. Most experts see anywhere between 6% to 7% home price appreciation in 2023 when those final numbers are announced.

Now, with the prospect of interest rate cuts on the horizon, home prices are expected to climb more than previously anticipated, according to Goldman Sachs Research.

Rates have dropped to their lowest level since June 2022 recently and are now hovering in the mid-6 percent range. The decline in rates has opened up demand, which experts say is elevating prices, partly because of the low inventory of homes available for buyers.

In simple terms, lower mortgage rates will lead to more expensive homes in the future – and waiting to purchase will more than likely cost buyers more money.

If you’d like to find out more and discuss strategy moving into 2024, don’t hesitate to reach out to me!

More Reasons for Optimism in the Housing Market

The real estate market has been historically slow since the Covid-era boom of 2020 and 2021. With that said, there’s good reason for optimism moving forward in 2024.

Existing home sales look to have hit the bottom, home builders are optimistic about the future, and single-family construction appears to be on the up-tick!

December’s Existing Home Sales Likely at “Bottom”

Home sales and construction slumped in December, but buyers and builders have reasons to be optimistic about the housing market this year.

Existing Home Sales fell 1% from November to December to a 3.78-million-unit annualized pace. That comes in below estimates of an unchanged reading per the National Association of REALTORS® (NAR). Sales were also 6.2% lower than they were in December 2022.

What’s the bottom line? This report measured closings on existing homes in December and likely reflects people shopping for homes in October and November, when rates peaked.

On that note, the National Association of Realtors Chief Economist, Lawrence Yun, said, “The latest month’s sales look to be the bottom before inevitably turning higher in the new year. Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”

More supply is certainly needed, as there were just 1 million homes available for sale at the end of December. This was down from 1.13 million at the end of November, and below healthy levels at just a 3.2 months’ supply of homes at the current sales pace.

Home Builders Optimistic About 2024

Confidence among home builders rose for the second straight month in January as falling mortgage rates have encouraged some buyers to resume their home search.

The National Association of Home Builders (NAHB) Housing Market Index climbed seven points to 44. While this is still in contraction territory below the key breakeven level of 50, the reversal marks a positive sign heading into the spring buying season.

All three index components moved higher this month. Current sales conditions rose seven points to 48, while future sales expectations surged twelve points to 57, moving into positive territory for the first time since August. Buyer traffic was also up five points to 29. 

What’s the bottom line? NAHB Chair Alicia Huey noted that, “Lower interest rates improved housing affordability conditions this past month, bringing some buyers back into the market.” Plus, 31% of builders surveyed reported that they’re still reducing prices to encourage sales, providing even more opportunities for buyers right now.

“Solid Showing” for Single-family Construction

Housing Starts fell for the first time in four months in December, down 4.3% from November.

While single-family Starts also saw a downtick from November, they still had a “solid showing” per the NAHB as they surpassed the million mark (1.027 million) for the second straight month. This reflects the number of single-family homes that would be built throughout the year if construction took place at the same rate in every month as it did in December.

Building Permits, which are an indication of future construction, were up 1.9% from November to December, with permits for single-family homes reaching their highest level in a year.

What’s the bottom line? “Mortgage rates steadily fell below 7% in December, and lower rates combined with a lack of existing inventory in most markets helped to keep single-family production above a one million-unit annual pace,” explained NAHB Chair Alicia Huey.

“And the fact that our latest surveys showed a big increase in builder confidence is an indicator that we can expect housing starts to improve in the coming months.”

A boost in supply will be welcome news for buyers around the country who have struggled with low inventory, though there is still a long way to go to meet the level of demand that exists among buyers.

white and brown concrete bungalow under clear blue sky

When we consider the pace of completed homes that will be coming to market (around 1.57 million homes annualized) and subtract roughly 100,000 homes that need to be replaced every year due to aging, we’re well below demand as measured by household formations that are trending at 1.9 million.

More demand than supply will continue to be supportive of home values, especially when we reach the busier spring homebuying season.

Do reach out to me for more information, as it would be my pleasure to help you in any way I can!

Conventional and FHA Loan Limits for 2024

Every year, the both the Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA) adjusts the conforming mortgage limits based on home price growth.

The agencies do this to keep pace with the market and to make sure buyers have access to the right levels of financing.

Conventional Limits

Starting January 1, 2024, new conventional loan limits will rise to $766,550 in most of the U.S. — with larger limits for high-cost areas.  These loan limits vary by county.

The agency announced a 5.56% increase to the borrowing ceiling of conventional mortgages. For one-unit properties, this amounts to a $40,350 jump from $726,200 in 2023 to $766,550 in 2024.

FHA Loan Limits

FHA loan limits are based on the Federal Housing Finance Agency’s conforming loan limits. Each year, FHA limits are set at 65% of the new conforming loan limits.

There’s not just one FHA loan limit. Rather, borrowers can access a wide range of loan sizes depending on the type of property they’re buying and where it’s located.

The Federal Housing Administration backs mortgages on 2-, 3-, and 4-unit properties. These types of homes have higher loan limits than single-family residences.

Although FHA allows multifamily home loans, the property must still be considered a “primary residence.” That means the home buyer needs to live in one of the units full time.

Contact Me

Do reach out to me to find out what the maximum loan limit is for a particular county, as it would be my pleasure to help!  And remember, if you decide to utilize a multi-unit property as a primary residence, low down-payment options are available!

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