In honor of Thanksgiving week, so here are three things we can be thankful for:
1) Interest rates are still very attractive at 4.375% to 4.5% for the 30-year fixed rate and 3.5% for the 5/1 ARM.
(The 5/1 ARM is fixed for the first five years, then adjusts every year thereafter. It is a make-sense choice for people who plan to keep the property for six years or less.)
2) The housing market has been improving for the past year, giving home owners more equity, and giving more sellers the ability to sell which gives buyers more inventory to choose from.
3) Buyer’s agents are free to home buyers. They are paid by the seller. Your buyer’s agent is required by law to get you the best price, best terms, and look out for your best interests in every aspect of the real estate purchase.
It is my opinion that making an offer between Thanksgiving and New Year’s Day is a good strategy for getting the best price. Typically, the market slows down during the holidays, so there is not as much competition. Sellers aren’t receiving offers or even lookers, so this is the time for you to pick up a good deal. Furthermore, the market tends to pick up in January when renters make New Year resolutions to become home owners.
Some years back, I bought a condominium for a great price in December. My agent told me later that the home owner was so angry when he saw my purchase offer that he threw the papers across the room. (Thankfully, I didn’t have to see it, because I had a buyer’s agent representing me.) But then his wife said, “Honey, let’s just make a counter-offer.”
The counter-offer was not bad. I countered again, per my agent’s suggestion, and I got a lovely home at an attractive price. I lived there for five years and made a nice profit when I sold.
With the recent rise in interest rates, does it make sense to pay a percentage point (1% of the loan amount) to get a lower interest rate?
That’s a good question, and I’ll tell you how I determine the answer, based on your individual situation. But first, for those who are not familiar, I’ll explain how you can a lower interest rate by paying a point.
What Does Paying a Point Mean?
Let’s say today’s interest rate for a 30-year fixed rate is 4.25%, but you would really love 4.0%. You can opt to buy down your rate by paying one percent of your loan amount as an upfront closing cost. For example:
$200,000 loan, 0 points, 4.25% = $983/mo. principal and interest
$200,000 loan, 1 point ($2,000), 4.0% = $954/mo. principal and interest
By paying $2,000 upfront, you save$29/mo. on your payment.
How to Determine If Paying a Point is a Good Choice
Calculate the monthly payment (principal and interest only) for your loan amount using the two interest rates that are available. Then subtract the smaller payment from the larger payment to get the savings. This is X.
Now divide X into the upfront cost. That will give you the number of months it will take to break even.
If you plan to keep your loan longer than that, you’ll come out ahead by paying the point. But wait! If it takes too long to break even on your money, it doesn’t make sense–even if you do plan to stay in your house for that long. You don’t want to wait five years to just break even, because there are better things you could do with that money.
Let’s look at our example above:
$2,000 upfront cost divided by $29 savings = 68.9 months or 5.7 years
Waiting almost six years just to break even on my $2,000 is something you want to say “no thank you” to doing. If you don’t need to keep that money in savings for emergencies, you could do better by putting it toward your principal balance when you make my first payment.
How One Home Buyer Saved $2,234!
Last month, a U.S. Veteran who was buying a home using the zero down VA loan signed up for my coaching service. He emailed me the Cost Estimate Worksheet for the lender he was planning to use. He chose this lender because it had received so many positive reviews online. The loan officer was very nice and accommodating, so he felt confident, but decided to have me check his paperwork as a safety measure.
When I looked at his estimate, I was not pleased! He was getting an interest rate that should have been zero points, but he was paying 1% or $2,234. That is in addition to the lender’s fees of underwriting $495 and processing $395. After our telephone consultation, he knew what he had to do.
The next day, he had a loan with the same low rate, no points! Needless to say, he is happy he used my coaching/consultation service to save himself $2,234 in upfront cash. Now he can use that money for his own good!
Look at Interest Rate Options Before You Lock Your Rate
Before you lock in your interest rate, insist on being given at least two choices. If you could pay a point and lower your rate enough that you would come out ahead after only 1.7 years (as happened for another one of my coaching clients), then it is worth the cost–assuming you have the available cash without financial hardship, of course.
Sometimes, you need to pay only a fraction of a point (less than 1%) to get a lower rate. It varies from day to day. There is no set formula.
A good loan officer will offer you options. But if he or she fails to do so, ask for options. This is your home, your mortgage, and YOU should be the one who chooses your interest rate. Just make sure you do the math so that you choose your best option.
And remember, you cannot lock in your rate until you have submitted a fully signed purchase contract to the loan officer. Interest rates are tied to a specific property address. So wait until then to do your interest rate/point comparison.
Interest rates have gone nowhere but UP for the past 3+ weeks. For home buyers still shopping around for the best deal, it’s like watching a nightmare unfold. Remember those 3.5% 30-year fixed rates? They’re gone!
Rates went to 3.625%, then 3.75%, then skipped right over 3.875% and landed on 4%, now up to 4.125%.
In some scenarios, it makes sense to buy down your rate to 3.75%, but you must do the math first. If the buy down is too expensive, reject it and take the 4.125%.
How to Check Your Buy Down Option
Look at the principal-and-interest payment using both interest rates.
Subtract to get the monthly savings.
Divide the monthly savings into the cost of the buy down.
This is the number of months it will take to break even. If you’ll break even in two years or less, I think it makes sense. If it’s taking five years or more to break even, I would not even consider it.
Get Your Written Rate Lock Confirmation!
You cannot lock in an interest rate until you have a mutually signed Purchase & Sale Agreement. This is because rate locks are tied to a specific property address. But once you have one, speak with your loan officer about locking in. If you are floating your rate (not locked), then you need to communicate with your loan officer every morning on where rates are at.
When locked, get it in writing. No exceptions.
I just heard from a home buyer, closing in 20 days, who believed his rate was locked in at 3.5%. Then he got a call from his loan officer…
“The bond market is going crazy. I suggest locking in. I can get you at 4% today,” he said.
“WHAT?!!! I thought I was locked at 3.5%.”
“No, you were floating,” he said.
My question is, what was the loan officer doing while the 3.5% rate was going to 3.625% and then to 3.75%? Why did he wait until rates went all the way to 4% to call his client? That is gross neglect, in my book. I suggested to the home owner that he call the manager and speak about this situation. Problem was, the loan officer was the manager!
Assume nothing. That is rule #1 in the mortgage game. You must get your rate lock confirmation in writing.
Where Do Rates Go From Here?
No one knows. No one was predicting the volatility we’re in now. Experts were saying, “The Feds are keeping rates low for the rest of the year.” It made sense. We need low rates to continue to support economic growth. Everyone thought rates would continue on at about the 3.5% level…right up until the sharpest rise in over 10 years. No one has a crystal ball that says where rates will go.
I’ve said it before, and I’ll say it again: If you see a rate you like, lock in and be happy.
Note to esteemed real estate agents: If your clients are taking their time house shopping, pass on this information to them. They need to know that the longer they wait, the higher the risk they’re taking of getting that cheaper monthly payment with a low-low rate.
The lowest interest rate mortgage programs make good sense for some people. But not for all. I’ll explain.
The longer an investor guarantees your interest rate, the higher the risk is to the investor. Therefore, the 30-year fixed rate program has a higher rate than the 15-year fixed rate. And the 15-year fixed rate is higher than the 10-year fixed rate.
The adjustable rate programs that guarantee your rate for less than 10 years offer the lowest interest rates. Today, I received in the mail a very attractive rate offer of 2.55%/2.88% APR. Let’s take a closer look.
You get 2.55% guaranteed for the first five years. After that, the rate will adjust based on Prime Rate + 0%. This means you pay about 1% less than the 30-year fixed rate, which is currently at 3.5%.
If your rate now is 4.5%, then refinancing to 3.5% probably is not going to make sense, after you account for the closing costs. But if you lower your rate by 2%, then it might. Here is a scenario for which it could make good sense:
* Your loan balance is fairly low.
* You continue paying your current payment with the extra going toward principal balance. Ideally, you would be a person who is already paying more and you would continue doing that. This way, your balance would drop significantly each month; especially with only 2.55% going toward interest.
* Your goal is to own your home free-and-clear as soon as possible.
After five years, you would have a very low or no balance. If a small balance was remaining, say $50,000 or less, then even if the interest rate was higher, it would not be problematic. With an adjustable rate, your new payment will be calculated based on the Prime rate and your current lower balance. So even if the rate goes up at the five-year mark, your payment probably would not exceed what you’re paying now anyway.
Don’t Take This Loan If…
* You are not 100 percent confident you can continue paying the higher payment — and will continue to do so. If you’re the type who might give into temptation to make the minimum payment due, this is not for you.
* Your balance is high, such that after five years, you will still have a significant balance owing.
* If you are the type of person who will lie awake at night fretting over what rates might do in the future.
Fine Print on This 5/1 ARM Offer
With the offer I’m looking at, closing costs are only $495. No prepayment penalty. Relock your rate any time you like.
If you’d like to consider this loan for yourself, please feel free to shoot me an email via my “Ask Carolyn a Question” page. You’re also welcome to post a comment or question.
In honor of Thanksgiving week, so here are three things we can be thankful for:
