Today’s episode was filled with emotion. We have all finally come to realize and must embrace that our current environment has changed. Over the last 10 years we have for the most part been on the down elevator in the rate department. Starting in the middle of 2021, interest rates began to climb very slowly. By January of 2022 it was evident that the rates were going to continue to push up on that rate escalator. As of March 1, we were barreling forward from slow steady upward climb to a high speed elevator in downtown.
Understanding that this is the new future, and preparing for additional rate hikes and higher mortgage interest rates by year end, I thought that it was the time to start looking at what alternatives are available to keep housing prices affordable, allow for current homeowners to take cash out of their homes without a huge increase over their current payment today. This pushed me to start looking at old programs that were part of daily life in loan origination back in the late 1990’s and early 2000’s.
Adjustable rate mortgages used to be one of the options that were presented to every client during every consultation. With interest rates as low as they have been over the last few years, those programs stopped making their way onto the options list. At a time where interest rates start to hit numbers that can become a challenging, it is important to introduce how they work, how long that they are locked in for, and what happens after the initial lock period is expired.
Additionally, most consumers have not heard of 1-1, 2-1, and 3-1 buydowns. Don’t confuse a buy down with discount points. Discount points would buy your rate down for the term of the loan. In general if you pay 1PT (1% of your loan amount) you can lower the market rate by about .25%. With a buy down, think of it as a start rate. You get a lower interest rate for an introductory period of time. In the 1-1 buy down, you would reduce your rate by 1% for the first year and then adjust to the note rate for the remaining term of the 30 year fixed. For example, if today’s rate is 5%, your first year you will make a payment based on 4%. The 2/1 buy down, using the same example of market rate being 5% would begin at 3% the first year, 4% the second year, and 5% being the rate for the remaining 28 years. The 3/1 buy down following the same pattern but beginning 3% lower than the market rate today.
The buydown program is a great fit for someone who knows that their income is lower today then where it will be in the future. Wondering if this is something that would work well for you? Consider where you expect your income to be by the time that the note has hit is full rate for the remaining term. Did you just start a job where you will get bonus income but it hasn’t started yet. At a lower hourly rate during a probationary period but you know that your annual raises will bring your income up to a point that the future payment will not be an issue. This could be a great program for you.
The last piece of this show included a solution for those of you who have an interest rate on your current mortgage that is so low that you hate to disturb it, but you know that you need to pull some cash out? Thought about a HELOC but worried about where the payment will be after all of the federal reserve rate hikes expected this year and next? Home improvements and debt consolidation don’t typically work on your schedule, but they need to take place. Our blended rate calculator will do the math for you. It’s not up to me or my team to convince you that it’s a good idea to refinance your home, but the match of the calculator will show you what you are paying today as an average between all your monthly debts. This will help you to feel more comfortable losing that rate that you currently have and moving forward with the debt consolidation or improvements that you have been considering.
This was a great show jam packed with a ton of education and programs that you probably didn’t know exist.
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Debbie Marcoux is licensed by the Department of Financial Protection and Innovations under the California Residential Mortgage Lending Act, NMLS ID 237926, also licensed in AZ-0941504, FL-LO76508, GA-69178, ID-167867, IL-031.0058339, NV-57237, OR, TN-184373, TX, WA-MLO-237926