If you’re trying to buy a place in New York City, you’re likely getting pretty rattled by rising mortgage rates, which make getting a loan much more expensive this year compared to last and reduce what you can afford to buy.
Mortgage rates are rising faster than expected—in fact the fastest in a decade—as the Federal Reserve raises interest rates in an effort to tamp down inflation. Last month, the average 30-year fixed rate rose above 5 percent for the first time since 2011 (with the exception of a brief spike in 2018) and is now about 5.39 percent, making the cost of a mortgage now about 40 percent higher this year—adding several hundred dollars to your monthly payments.
To offset these rising costs, borrowers are reverting to strategies like opting for adjustable rate mortgages, buying points, and fixing their credit score. Not every tactic works for every buyer, so be sure to get the advice of a professional. Read on for more intel on these tactics.
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1. Consider an adjustable rate mortgage
If you remember the 2008 financial crisis, you may have a sense that this is a type of loan to steer clear of, but Melissa Cohn, regional vice president and executive mortgage banker at William Raveis Mortgage, expects to see a resurgence in adjustable rate mortgages or ARMs in the months to come. Applications for ARMs have already doubled in the past three months, according to the Mortgage Bankers Association.
An ARM has an interest rate that adjusts over time based on the market (that resetting was what tripped up borrowers during the housing meltdown).
The advantage to an ARM is “rates are considerably low, some are even in the 3s,” Cohn says, adding that adjustable mortgages—“the ones that got the bad rap with rates that adjust every month” are not the same loans being offered today—these days there are more protections for borrowers.
There are some adjustables, Cohn says, that work like a hybrid fixed rate. “You’re locking the rate for a period of five, seven, or 10 years and the rate only begins to adjust after that,” she says. The point is you’re locking in a rate while the Fed is going to keep raising rates, she says.
Here’s the key to this strategy: You can refinance an ARM into a fixed-rate mortgage (or even into another ARM). “You can refinance it anytime—day after you close, a month, or a year later and there are no pre-payment penalties,” Cohn says.
It’s a good way to “give you back your buying power—it’s much more comfortable for your wallet,” she says.
However, with an ARM, it’s important to understand the fine print and understand when your loan is going to reset, says Kevin Leibowitz, president and owner of Grayton Mortgage.
“You need to have your finger on the pulse of what’s going one—it’s not right for everyone,” he says. You need to understand how often your ARM will adjust and pay attention to the increase estimates that mortgage servicers send you.
2. Improving your credit score
For buyers with a credit score already above 700 improving your credit score “may not move the needle much” but for borrowers below 700, it can help, Leibowitz says.
That’s because a score of 700 to 739 is considered good credit (and above that is considered excellent credit, according to Nerd Wallet).
A buyer with a credit score of 700 looking to make a $750,000 purchase with a loan of $600,000 could qualify for a 5.375 percent rate, Leibowitz says, while a buyer with 650 credit score looking to buy the same property with the same terms would get a 6.25 percent rate.
So how do you raise your credit score in order to get a better mortgage rate?
“Before applying for a loan, you should look to ensure your credit report is in order so you do not have any surprises. Your credit score could play a role in the products and terms you can qualify for, says Brittney Baldwin, a vice president at National Cooperative Bank (a Brick Underground sponsor).
If there are errors in your credit report—address these immediately, Baldwin says.
Then look at what is bringing down your score. If it is credit card debt—you need to make regular payments and bring your debt down to about 15 to 30 percent of your available credit. For more tips, read: “A bank rejected my mortgage application because of my bad credit score.”
3. See if you can buy points
Another option is to pay for points—also known as “buying down the rate,” “prepaid interest,” or “discount points,” which you can do if you happen to have some cash left over or are getting a credit at the closing table.
This is an attractive option for buyers who know they’re going to remain in their property for the longer term and can afford to pay more upfront.
“The goal is to get the lowest rate and lowest fee possible,” says Eli Sklar, a senior loan consultant at LoanDepot previously told Brick. “Sometimes the lowest rate is not available unless you pay upfront to lower the rate for the life of loan,” he says.
How the math works: Buying each point typically lowers the interest rate on your mortgage by up to 0.25 percent.
One point costs 1 percent of your mortgage amount, or $1,000 for every $100,000. So one point on a $400,000 mortgage would cost $4,000. By making a single, one-time payment, qualified applicants can reduce their monthly payments every month, Sklar explains.
For more information, check out: “What are mortgage points and how do they lower your interest rate?”
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