Last week, I argued that mortgage rates remain in a downward trend, despite some recent reversals.
The 30-year fixed was almost below 6% when the Fed announced its tapering. That “news selling” event led to a slight increase in rates.
Then a hotter-than-expected jobs report days later pushed the 30-year to 6.5% and rates continued to rise from there.
They are now close to 6.625% and once again there are fears that the worst may be behind us.
Whether that’s true or not, you can’t get as low a price as you could three weeks ago, and that makes short-term buying attractive as well.
You don’t get your money’s worth on purchases forever
While some home buyers and mortgage lenders were able to lock in rates below 6% in September, many are now looking at rates closer to 7% again.
This has made mortgage rates unattractive as well, especially since there aren’t many low-cost options these days, such as adjustable-rate mortgages.
You are stuck on a fixed 30-year continuance that is not worth keeping for close to 30 years.
And you pay a premium for it because the rate won’t adjust over the life of the loan.
Another option to make it more palatable is to pay discount points to get a lower price from your destination.
But there is a big downside to that. If you buy your rate with discount points, of course forever. This means that the money is not refunded if you sell or refinance early.
You need to maintain the loan for X amount of months to break even with the upfront costs.
For example, if you pay one mortgage point when you pay off a $500,000 loan, that’s $5,000 that will need to be paid back in lower mortgage payments.
If rates go down six months after you take out your mortgage, and you refinance, that money doesn’t come back out of your pocket.
It’s gone forever. And that can obviously be a very frustrating situation.
Is It Time To Consider A Short Term Purchase Again?
Another option for getting a lower mortgage rate is short-term buying, which is just as the name suggests. temporarily.
Usually, you get a lower rate for the first 1-3 years of the loan term before it goes back to the higher rate of the notes.
Although these are painted as more risky because they are similar to adjustable rate loans, they can still close the gap to lower rates in the future.
And perhaps most importantly, money spent on short-term purchases refundable!
Yes, even if you go with a short-term purchase, and then refinance or sell after a month or two, the funds are added to your remaining loan balance.
For example, if you have $10,000 in short-term funds and prices suddenly drop and the rate and payback period are reasonable, you can take the opportunity without losing that money.
Instead of simply eating the remaining funds, the money is usually used to pay off the loan, as explained in the Fannie Mae chart above. Say you have $9,000 left in your checking account.
If you go to refinance, that $9,000 will go toward the loan payment. So if the loan balance was $490,000, it will be reduced to $481,000.
Interestingly, this can also make your financing cheaper. You will now have a lower loan amount, which may push you into a lower loan-to-value (LTV) category.
What Are the Risks?
To sum things up, you have three, perhaps your options when taking out a loan today.
You can go with an ARM, although the discounts are usually not good and not all banks/lenders offer them.
You can just go with a 30-year fixed and pay nothing at closing at a slightly higher rate, with the goal of paying back the money sooner rather than later.
You can pay discount points at closing to buy a permanent amount, but then you lose money if you sell/refinance before the closing date.
Even if you go with a short-term purchase, enjoy a low rate for the first 1-3 years, and hope to recoup something for something permanent before the rate goes up.
The danger with ARM is that the rate eventually adjusts and may become unattractive. As noted, they are also hard to come by now and they may not offer a huge discount.
The risk with a standard and high-cost mortgage is that the rate is high and you can be stuck with it if rates don’t go down and/or you can’t refinance for any reason.
The risk with buying down forever is that prices can continue to fall (my guess) and you could be leaving money on the table.
And the risk of a short-term purchase is almost the same as an ARM because you may be stuck with the higher rate of the note if rates don’t go down. But at least you’ll know that that number is that number, and that it can’t go any higher.
Read on: It’s a relatively short-term purchase
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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