Rates are up but read on to learn about two ways to deal with what we all hope is a temporary jump in interest rates.

Traditional banks, in addition to their conventional fixed rate 10, 20 or 30-year loans, can make adjustable rate mortgage (ARM) loans of 5 to 7 years or more with the monthly payment equivalent to that for a 30-year amortization schedule. At the end of the term the loan comes due or may be recast. The rates on an ARM are typically lower than a conventional 30-year fixed rate mortgage. If you are confident that either 1) you will sell before your ARM comes due or 2) rates will be lower when it comes due and you can refinance, this is for you.

However, if you feel you may be in the home longer than the term of an ARM or that rates may continue to go up, mortgage companies offer temporary rate buy-down programs over 2 or 3 years. Then if rates have dropped, you can refinance or, if they’ve gone up, you’re protected from the increase. On a $400,000 home, the rate buy down can reduce monthly payments in the first year from about $2,400 to just $1,700. If you can get a seller to fund the rate buy down in lieu of a price reduction, this makes a much bigger difference in monthly payments than a lower sale price.

Tommy Thomas at First Financial Bank offers this insight into rate buy downs which are being considered more often these days:

“Since mortgage rates have been hanging right around 7% for the past few weeks, I have had buyers ask if they should consider buying down the rate (points) to get a better rate. I am not a fan of buying down the rate in this interest rate environment. Rates are going to come down at some point, the BIG question is when. It could be in 3 months or it could be in 24 months. The majority of the time, the break even point of buying down the rate is 24-30 months. If rates fall next Spring and it makes sense for your buyer to refinance, he/she is out the points they paid upfront at the time of closing. I go over these scenarios when talking with your client b/c its their decision at the end of the day. In some instances it might make sense to but if the breakeven point on buying the rate down is over 2 years, I would take the rate without the points and wait to refinance. I am happy to go into more detail on this but wanted to bring this up as its coming up more and more since rates have risen and held at their current positions.”

A look at interest rates over the last 30 years at this link may help you decide which option feels best to you. To learn more, call us or your favorite lender.

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