This is the fourth week in a row that mortgage rates have moved up in double-digit increments.
The average rate on a 30-year fixed-rate mortgage rose 15 points to 7.41% APR in the week ending Oct. 8, according to rates provided to BW by Zillow. (A basis point is one one-hundredth of a percentage point.) We calculate our weekly average using daily APRs recorded over the past five business days.
That substantial week-over-week change pales in comparison to the month-over-month. Mortgage rates have shot up a whopping 67 basis points over the past month. That’s a huge jump, and it’s eating into home shoppers’ budgets.
Say you can handle a $3,000 monthly principal-and-interest payment. A month ago, a $463,000 home would have been in your price range. At today’s average rate, the maximum you could comfortably afford is $432,900. In just a month, you’ve lost over $30,000 in buying power.
Higher mortgage interest rates have already sent buyers looking for workarounds. A report released Monday by real estate tech firm ICE Mortgage Technologies noted that adjustable-rate mortgages have been gaining in popularity in recent months. But if you don’t want to deal with the complexity of an ARM, let’s talk through two much simpler ways you can get a lower mortgage rate.
Mortgage points: Less discount, but longer lasting
“Buying down” your rate means prepaying mortgage interest to shave some basis points off the interest rate. Buying mortgage points is one way to do that. Fair warning: Though mortgage points are sometimes called discount points, they don’t come cheap.
Mortgage points are units of prepaid interest. Generally, you pay 1% of your total loan amount to bring down your rate a quarter of a percentage point, a.k.a. 25 basis points. It adds to your closing costs, but decreases the amount of interest you pay over the life of the loan. Mortgage points give you a permanent buydown. As long as you keep the same loan, you’ve got that discount on the rate.
“As long as you keep the same loan” can be a pretty big caveat. To actually get your money’s worth on the points, you need to feel confident that you’re going to keep both the home and the loan for a while. Points are only really worth it once you’ve hit the break-even — that’s when you’ve saved more in interest than you paid for the points. If you sell or refinance before breaking even, the points didn’t actually save you money.
Despite their drawbacks, points are popular. As of August, when mortgage rates were nearly a percentage point below their current level, one in eight borrowers were buying at least two points, according to numbers from real estate tech firm ICE Mortgage Technologies. It’s a safe bet that as rates have climbed, so have the number of buyers paying for mortgage points.
The norm is for buyers to pay for their own points, but … what if you asked the seller for some funds? Nationwide, the housing market’s been coming into a better balance, so buyers are finally starting to have more leverage. (Note that this isn’t true everywhere — if you’re near New York City or in San Francisco, for example, sellers still have the upper hand).
It’s definitely worth considering whether asking for this kind of seller concession — cash at closing to pay for points — would make sense. Your real estate agent or mortgage broker can help you math out if you’ll get a bigger benefit asking for closing costs instead of asking for a price reduction.
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Temporary buydowns: Deeper discount, but shorter term
Points aren’t the only option. A temporary buydown can get you a bigger discount, though only for the first few years of the mortgage. Temporary buydowns tend to work in much larger increments than points. Usually, it’s one percentage point off the mortgage rate per year.
Here’s how a temporary buydown works. A 2-1 buydown would drop your interest rate two percentage points for the first year of the loan, one percentage point for the second year of the loan, and then you’d start paying the full cost in year three.
Let’s say you have a mortgage with a 7% interest rate, but you opt for a 2-1 buydown. This means that for the first year, you would pay a 5% interest rate, the second year 6%, and then the full 7% after that.
Temporary buydowns are not very common, with less than 2% of purchase loans using them as of August, according to ICE Mortgage Technologies. However, those who do use them are usually looking to save money, with 30% of purchasers using temporary buydowns also buying at least one point.
The main drawback of temporary buydowns is that the discount is only temporary, and you still need to qualify for the loan at the full interest rate. However, the savings can be beneficial, especially when starting off in a new home can be expensive. Since the buydown only lasts a few years and is typically paid for by someone else, breaking even is not usually a concern.
Temporary buydowns are often seen in new construction, as builders commonly offer them as incentives. Some mortgage lenders also provide buydown options. Alternatively, you can ask the seller to pay for the buydown. following sentence: “The cat chased the mouse around the house.”
The mouse was chased around the house by the cat.