Corrected housing prices, a lower number of unsold homes, and tighter credit standards kept the average interest rate on 30-year fixed mortgages near historic lows over the past decade. But starting in early 2022, the U.S. Federal Reserve began to raise interest rates to curb inflation. Rates are now at their highest level since 2009, and most experts agree they’ll continue to rise through 2023.
What does this mean for people buying a home in Central Florida? As the area’s leading real estate broker, we advise our clients they shouldn’t necessarily be discouraged from buying a home. In fact, if you’re considering purchasing a new property, now could be an excellent time to invest!
Buying a Home as Mortgage Interest Rates Rise
Higher interest rates lead to higher monthly payments and more interest paid over the life of your loan. However, while there’s no escaping rising rates, there are steps homebuyers can take to lower what they pay. Let’s look at some of the best strategies for doing just that.
Look beyond a 30-year fixed-rate mortgage.
There’s a broad range of financing options available to home buyers. For instance, adjustable rate mortgages (ARMs) tend to have lower initial rates, often over a point lower. These loans begin with a fixed interest rate for a set number of years. Once that period ends, the interest rate adjusts up or down depending on market conditions. There’s no guarantee your rate will be lower when your initial rate expires, but betting on a future downward rate cycle could be a risk worth taking.
Use points to buy down your rate.
Buyers can lower their mortgage interest rate by buying discount points that decrease their rate by 25 basis points or 0.25 percent. Each point typically costs one percent of your loan. So, if you’re looking to borrow $400,000, one discount point will cost you $4,000. To bring your rate down a full percentage point, you’d pay $16,000.
Is buying points worth it? Yes, if it saves you enough on your monthly mortgage payment. And by buying just one point that reduces your monthly payment by, say, $100, you would break even in less than three years. That’s great savings if you plan to remain in the home for at least that long.
Increase your cash commitment.
Banks see borrowers who make a larger down payment as less risky—and that could translate into a lower interest rate on your loan. For those with available cash, a larger down payment also results in lower monthly payments. And, if you’re investing in new construction, you can pay for upgrades out-of-pocket. Crunching the numbers with your lender or financial adviser can help determine if more cash upfront will help you obtain a lower interest rate.
Opt for a shorter-term loan.
The longer your loan term, the more interest you pay. While shorter-term loans have lower interest costs, they do come with higher monthly payments. Still, a 15-year loan typically comes with an interest rate that’s .5% to .75% lower than comparable 30-year ones, so the long-term savings can be substantial.
And because you’re paying much less interest over the loan’s life, you build equity in your home that much faster. Just be sure to run the numbers carefully before committing to this type of loan.
Expand your options.
The average national price for an actively listed single-family home has increased to an all-time high. Whether you’re buying a primary residence or second home, if your wish list is narrowed to one or two specific (and popular) neighborhoods, you could find yourself paying more than you expected.
Some Central Florida markets remain more affordable than others, so being willing to broaden your search area, or considering condos and townhomes in the communities you love, can be a rewarding approach.
Make lenders compete for your business (and money).
You’ve probably heard it’s a good idea to shop around and compare mortgage rates when buying a home. It’s even better to let lenders know you’re doing it. Lenders want your business, and you could find one willing to make a little less than the others off your loan.
Most lenders compete by offering different rates and fees. Talk to at least three or four, including traditional banks, savings and loans, and credit unions, and compare their offers. Once you determine your best offer, talk to your preferred lender first to see if they’ll match or beat it. If the answer’s no, ask if they’ll budge on other items like origination and underwriting fees.
It’s Still a Good Time for Buying a Home in Central Florida
Home values in Central Florida have risen by about 80% over the past five years and will likely continue to go up for the next five. So, as higher interest rates are likely to restrict property price increases, buying a home here is still a wise investment.
Ready to learn more? Have more questions on current interest rates? Contact Bee Realty Corp online or call us at 386-279-7522.