Knowledge Center

How to Lessen the Impact of Higher Mortgage Rates

buying-a-home | Read Time: 3 minutes

By Jeffrey M. Ruben | Published: July 2022

How to Lessen the Impact of Higher Mortgage Rates

With interest rates and home prices at their highest levels in years, many potential homebuyers are hitting a double wall of financial strains when trying to find a home they can afford and pay for it.

However, there are options for homebuyers that can help lessen the impact, especially on their monthly mortgage payments.

Buy Points
Buying points, also known as “buying down the rate,” is a common way for homebuyers with some extra cash on hand to reduce their monthly payments. Even in low interest rate environments, many borrowers might buy points to reduce the total amount of interest paid over the life of the loan.

Here’s how it works.

If you have extra cash after closing costs and your down payment on a mortgage, buying points is a straightforward way to whittle down your interest rate. Each point purchased costs 1% of the mortgage, so buying one point on a $300,000 mortgage would cost $3,000.

Typically, each point purchased lowers the interest rate on your mortgage by approximately 0.25%, so if your interest rate was 5%, it would now be 4.75% for the life of the loan.

Your $3,000 upfront investment buying one point at closing reduces your interest rate, monthly payment and, ultimately, overall cost of the loan.

Get an Adjustable-Rate Mortgage (ARM)
After the 2008 financial crisis, adjustable-rate mortgages’ reputation as a viable means of financing a home took a big hit.

However, ARMs are making a comeback in today’s high rate, high-cost housing market because for the right borrower, they can provide great value and knock down entry barriers.

ARMs typically start with lower interest rates than fixed-rate mortgages and can be especially advantageous to borrowers when rates are higher, and because higher rates cut into the amount of money a homebuyer can affordably borrow, they lose buying power.

An adjustable-rate mortgage can help a borrower regain some of that power by offering a lower introductory interest rate that stays the same for a pre-determined timeframe, usually between three to 10 years, before the interest rate changes.

This can be especially helpful for first-time homebuyers who plan to upgrade before the introductory term expires, or homeowners that expect their household income to increase or to have paid off other debt, such as student loans, over this period of time.

If you go the ARM route, pay attention to interest rates during the introductory period and if the fixed rates dip below your ARM rate, consider refinancing to lock in a fixed rate and term.

ARMs are not for everyone though. If you plan to stay in your new home for the next 10 years or more, an ARM carries substantial risk as once the introductory period expires, your interest rate will likely rise in conjunction with the current rate environment at that time.

It’s also important to remember that just because an ARM could get you more buying power in a higher price range, that doesn’t mean you should do it. You may need to adjust your expectations for how much home you can truly afford and stick with a fixed-rate mortgage to stay within your short- and long-term budget.




About the Author – Jeffrey M. Ruben
Jeffrey M. Ruben, President, WSFS Mortgage, joined WSFS through its acquisition of Array Financial, a full-service mortgage banking organization, and Arrow Land Transfer in August 2013. Jeff formed Array and Arrow in 2005, having previously held senior executive roles at financial and legal institutions.

 

Rental Market Pricing You Out? Buying a Home May be a Better Bet

Rental Market Pricing You Out? Buying a Home May be a Better Bet

For the past several months, home prices have been rising at rapid rates, making it difficult for prospective homebuyers to find the right home because of a tight and highly competitive market.

Read More
Mortgage Rates Are Still Rising, and So Are Selling Prices. Here’s How to Adjust Your Buying Approach

Mortgage Rates Are Still Rising, and So Are Selling Prices. Here’s How to Adjust Your Buying Approach

There is no question about it. We are in a different homebuying environment than we were even six months ago. Mortgage interest rates continue to rise and have now exceeded pre-pandemic levels, while home prices have stayed high amid continued competition. In some cases, potential homebuyers have been priced out of the market.

Read More
WSFS Down Payment Grant Program Helps Eligible Borrowers Achieve the Dream of Home Ownership

WSFS Down Payment Grant Program Helps Eligible Borrowers Achieve the Dream of Home Ownership

For many families in the Greater Philadelphia and Delaware region, the dream of owning a home can seem financially daunting, even out of reach. While there are many local, state and federal programs designed to help homebuyers achieve this dream, coming up with upfront costs, such as down payment and closing expenses, can be challenging, especially in low- to- moderate income areas.

Read More
What to Look for When Building Your Homebuying Team

What to Look for When Building Your Homebuying Team

With mortgage rates rising, the homebuying market remains hot and very competitive, with inventory strains continuing to affect home prices. Despite these challenges, if you are in the market for a new home, now is the time to act as prices and rates may continue to rise through at least the end of 2022. And if you wait, you will pay more for the same home later than you would now.

Read More
WSFS Mortgage Offers New Program to Help Customers Realize Their Dream of Homeownership

WSFS Mortgage Offers New Program to Help Customers Realize Their Dream of Homeownership

For many aspiring homebuyers, the biggest challenge to achieving their dream of homeownership is the upfront costs. Add in rising prices, stiff competition and bidding wars for houses over the past year, and the obstacles can seem overwhelming.

Read More