Tag: mortgage (Page 1 of 2)

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

February 17, 2024 / Tom Bonetto

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!

The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.

Mortgage Rate Update – March 2022

March 22, 2022 / Tom Bonetto

white android tablet turned on displaying a graph

Mortgage interest rates just keep moving higher. They have risen nearly 1.5% points since January 3^rd… and it seems like almost every day rates move up again.

The outlook for lower rates isn’t great right now, thanks mostly to the Federal Reserve’s handling of the money supply and out-of-control inflation.

How will the Fed’s recently announced quarter point hike to the Fed Funds Rate affect mortgage interest rates? The answer may surprise you.

The Federal Reserve

The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years. More on that here….

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

You probably know that inflation has been rising significantly of late, and as a result, so have mortgage rates. Inflation is pushing 9%, the highest level we’ve seen in over 40 years. This has moved mortgage rates into the mid 4% range this week.

Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage. This brings market instability and increased mortgage rates.

When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline. History proves this during rate hike cycles for the past 50 years. Unfortunately, this isn’t an overnight fix.

*Federal Reserve Chairman Jerome Powell*

However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility. And if inflation continue to surge, the Fed might not be able to do much to help. The situation isn’t great at this moment.

30-year fixed mortgage rates

The average 30-year fixed-refinance rate is 4.53 percent, up 20 basis points over the last week. A month ago, the average rate on a 30-year fixed refinance was lower, at 4.17 percent.

At the current average rate, you’ll pay $503.13 per month in principal and interest for every $100,000 you borrow. That’s $7.08 higher compared with last week.

Mortgage Rates and Treasury Yields – a great barometer

Fixed mortgage rates and Treasury yields tend to move together because fixed-income investors compare the returns they can get on government and mortgage-backed securities.

Investors compare yields on long-term Treasuries to mortgage-backed securities and corporate bonds. All bond yields (including mortgage backed securities) are affected by Treasury yields, because they compete for the same type of investor.

Mortgages, in turn, offer a higher return for more risk. Investors purchase securities backed by the value of the home loans—so-called mortgage-backed securities. When Treasury yields rise, investors in mortgage-backed securities demand higher rates. They want compensation for the greater risk.

You can dig deeper by reading Kimberly Amadeo’s article here…

You can see the rise in the 10-year treasury yield here…and mortgage rates have been following a nearly identical course over the last 3 months.

What Really Causes Rates to Rise and Fall?

Mortgage rates are determined by a complex interaction of economic factors, such as the level and direction of the bond market, including 10-year Treasury yields; the Federal Reserve’s current monetary policy, especially as it relates to funding government-backed mortgages; and competition between lenders and across loan types.

Because fluctuations can be caused by any number of these at once, it’s generally difficult to attribute the change to any one factor. Although in our current situation, inflation (and the Fed’s mismanagement of it) is the number one cause. When this is coupled with the large increase in government spending, you see a double dose of fear in the markets.

roll of american dollar banknotes tightened with band

In today’s case, the Federal Reserve has been buying billions of dollars of bonds in response to the pandemic’s economic pressures, and continues to do so. This bond-buying policy (and not the more publicized federal funds rate) is a major influencer on mortgage rates.

On March 16, the Fed announced that it expects to begin reducing its balance sheet in May, meaning it will start reducing the overall amount of bonds it owns. This will be on top of its existing move to reduce new bond purchases by an increment every month, the so-called taper, which began in November.

You can find out more here from Investopedia….

Most experts agree that this “taper” will also move treasury yields and mortgage rates higher.

Moving Forward

There may come a point when mortgage rates drop back down and borrowers can enjoy some of the remarkably low rates they were available from mid-2020 through late 2021.

And throughout 2022, we could have periods when rates dip to some degree.

But for the most part, borrowers may need to come to terms with the fact that the days of record-low borrowing are behind us.

With that said, it’s important to put today’s rates into perspective. Compared to the rates we saw from mid-2020 through the end of 2021, the rates above look high. But historically speaking, locking in a 30-year mortgage anywhere in the 4% range is not a bad deal at all.

Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage of today’s market. It would be my pleasure to help you!

It’s Easier to Qualify for a Mortgage Than You Might Think

August 3, 2019 / Tom Bonetto

One of the largest misconceptions that potential borrowers have about buying a home is that it’s too tough to qualify for a mortgage.

Qualification can be a lengthy process, to be sure, but it isn’t impossible by any stretch.

Think about it this way…people buy homes every day, and many borrowers don’t have the perfect situations.

Erik J. Martin from The Mortgage Reports has put together an interesting piece that I’ve linked to here. I highly recommend you take a look at it – and I’ve summarized some of it in this article.

Don’t Overthink the Perceived Difficulty

Believe it or not, most potential borrowers with a reliable job, that have regular income, and average credit can most likely qualify for a mortgage. Of course, there are specific regulations that must be met, but qualification isn’t as tough as many might think.

Interestingly, many potential buyers willing to own a home don’t even try to qualify for a mortgage. Many believe that rigid mortgage requirements will disqualify them.

Per Martin’s article: “new research indicates that consumers think it’s harder to qualify for a mortgage loan than it actually is. And many lack the facts and know-how to properly pursue home financing.”

He continues: “don’t rule out buying a home because you think you’re ineligible for a loan. Chances are that, armed with knowledge and the right guidance, you can buy that home you’ve been thinking about.”

Report: Consumers believe guidelines are tougher than they really are

Martin references the study from Fannie Mae that recently polled 3,000 consumers about their understanding of mortgage requirement rules. Some findings were surprising:

Only 11 percent were aware that the minimum FICO credit score needed to obtain a mortgage is 580. Most thought it was 650.
Over 40 percent didn’t know their own credit score.
Most people think you need to put down at least 10 percent for a down payment. The truth is, the median is 3 percent; some programs don’t even require a down payment.
Only 23 percent of respondents were aware that low down payment programs are available.
Over three in five didn’t know that the debt-to-income ratio lenders don’t want total debt payments to exceed is 50 percent.
Only 12 percent of homeowners and 9 percent of renters were able to identify the correct credit score range needed to qualify for a mortgage.
The top five reasons cited for expected difficulty in getting a mortgage were
- Insufficient income (chosen by 23% of respondents)
- Too much debt (17%)
- Insufficient credit score/credit history (15%)
- Affording the down payment or closing costs (14%)
- Lack of job security/stability (9%)

One more thing regarding those who would rather rent than buy…the report intimates that these are the people are most unclear about mortgage requirements.

My guess is that this uncertainty is holding them back from learning more details or reaching for a goal that seems to difficult.

Give it a Try!

More often than not, there are two things get in the way of buyers seeking a mortgage: their own fears and lack of info about mortgage requirements.

There are many things potential borrowers can do – one of the first is finding out your FICO credit score. You can find more on that here….

Most importantly, reach out to a trustworthy lender and go through the mortgage application process.

When talking with your lender, make sure to ask about different loan options – and find out what you qualify for. Learn what your minimum down payment and credit score need to be.

Determine how much you’ll pay monthly and over the course of a given loan. Your lender can also talk with you about the particular requirements for that particular loan.

Please do reach out to me, as it would be my pleasure to help!

Before Making a 20% Mortgage Down Payment, Do Read This

March 2, 2019 / Tom Bonetto

“How much should I put down on a house?”

It’s a question that I hear all the time from would-be home buyers— especially first-timer purchasers.

And, the answer is: “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”

Or, perhaps your situation is reversed.

“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”

Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”

“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Larger Down Payments Actually Increase Risk

Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.

In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.

The riskiest decision we can make when purchasing a new home?

Making too big of a down payment.”

The Higher The Down Payment, The Lower Your Rate of Return

The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

With 20% down on the home — $80,000 –your rate of return is 25%
With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!

FHA and Conventional Mortgage Options – Which is Better?

October 21, 2018 / Tom Bonetto

I’m often asked about the different types of loans available for those with a limited down payment. The main options are Fannie Mae and Freddie Mac conventional mortgages or FHA loans. But which one is best?

The FHA versus conventional analysis involves taking a look at your credit score, your available down payment, and your long-term financial goals.

Let’s take a look at all 3 issues:

1. Credit score – buyers with low-to-average credit scores may be better off with an FHA loan. FHA mortgage rates are generally slightly lower than conventional ones for applicants with lower credit, and FHA loans allow credit scores down to 580.

2. Down payment – borrowers can come in with a lower down payment with conventional products, at just 3% down. FHA requires 3.5% percent down.

3. Long-term goals – conventional mortgage insurance can be cancelled when the home achieves 20% equity. FHA mortgage insurance is payable for the life of the loan and can only be canceled with a refinance. Buyers who plan to stay in the home five to ten years may opt for conventional, as the FHA mortgage insurance can add up over time.

For a more, I’d invite you to visit the source at The Mortgage Reports and Dan Green’s post.

FHA Or Conventional – Which is Superior?

There are a multitude of low-down payment options for today’s home buyers but most will choose between the FHA 3.5% down payment program and conventional options such as HomeReady, Home Possible, and Conventional 97.

So, which loan is better? That will depend on your circumstance.

For example, in deciding between an FHA loan and a conventional option, the borrower’s individual credit score matters greatly. This is because the credit score determines whether the borrower is program-eligible; and, it affects the monthly mortgage payment, too.

FHA loans are available with credit scores of 580 or better. The conventional options, by contrast, require a minimum credit score of 620.

Therefore, if your credit score is between 580 and 620, the FHA loan is essentially the only available option.

As your credit score increases, though, the conventional options become more attractive. Your mortgage rate drops due to the lower score and your mortgage insurance costs do, too. This is different from how FHA loans work.

You can find out much more about mortgage insurance here….

With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.

Therefore, over the long-term, borrowers with above-average credit score will typically find conventional loans more economical relative to FHA ones.

In the short-term, though, FHA loans generally win out.

A Second Thought

One main consideration has to be the length of time you would expect to “keep” this mortgage.

Borrowers should take into consideration that FHA MIP is forever but conventional mortgage insurance goes away at 80% loan-to-value. This means that, over time, your conventional option can become a better value — especially for borrowers with high credit scores.

It’s hard to know for how long you’ll hold a loan, though. Sometimes, we expect to live in a home for the rest of our lives and then our circumstances change. Or, sometimes mortgage rates drop and we’ve given the opportunity to refinance.

As a general rule, though, in rising-value housing market, if you plan to stay in the same home with the same mortgage for longer than six years, the conventional 97 may be your better long-term fit.

One other thing to consider is upfront charges.

The FHA charges a separate mortgage insurance premium at the time of closing known as Upfront MIP. Upfront MIP costs 1.75% of your loan size, is generally added to your balance, and is non-recoverable except via the FHA Streamline Refinance.

Upfront MIP is a cost. The conventional versions do not charge a fee.

FHA vs Conventional Infographic

Image Courtesy of The Mortgage Reports

You can find out much, much more about low-down payment options, as well as the specifics of these loans here.

For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing and there are others in which the conventional option is the clear winner. Rates for both products should be reviewed and evaluated.

It would be my pleasure to help you find the version that’s most optimal for your situation, so please do contact me for more details!