How savvy homebuyers use mortgage strategies to cut their interest rates

After years of record-low mortgage rates, many homebuyers are frustrated by paying more than 8 percent interest to buy a new home.

“Nobody loves rates in the high 7s or 8s, but they’re not sticker shocked like they were in the beginning,” said Nicole Rueth, senior vice president of The Rueth Team powered by Movement Mortgage.

However, using mortgage strategies can reduce monthly payments and save thousands over the loan’s lifetime.

Rate buydowns

These strategies include 3-2-1 or 2-1 rate temporary buydowns on fixed-rate mortgages, permanent rate buydowns, adjustable-rate mortgages, cash purchases, and utilizing down payment assistance programs.

A 3-2-1 mortgage buydown reduces the interest rate by 3% in the first year, 2% in the second year, and 1% in the third year. After the buydown period ends, the mortgage reverts to the original rate.

A 2-1 buydown lowers the mortgage interest rate for the first two years before it rises to its regular, permanent rate.

“For most people, it would make the most sense to do a temporary buydown,” said Jody Petrillo with Supreme Lending-Denver.

Buyers or sellers can pay points to lower a borrower’s interest rate permanently. One point equals 1% of the loan amount.

“Right now, buyers are expecting a deal,” Rueth said. “They either expect the seller to help with closing costs or a rate buy down.”Some mortgage companies also offer temporary rate buydowns. Many homebuilders offer permanent rate buydowns for buyers who work with their preferred builders.

For rate-sensitive buyers, new construction may offer the best option, said Nathan Spector with 8z. “Last month, I had a buyer who closed with a rate in the mid-5s on a new construction home in Aurora,” Spector said. “The buyer hadn’t gone with the builders’ preferred lender, he would have paid a 2% higher rate.”

Compare rates

Homebuyers should explore all their options, including comparing the rates between 30-year and 15-year mortgages and adjustable-rate mortgages.

On Nov. 6, the rate for a 30-year fixed-rate mortgage was 8.1%, a 15-year fixed-rate mortgage was 6.8%, and a 5/1 adjustable rate mortgage was 7.1%. Under a 5/1 loan, the rate remains unchanged for the first five years, then adjusts annually.

Petrillo said adjustable-rate mortgages are becoming more popular because they offer a lower rate, and a homebuyer could refinance if rates drop. “It’s so hard to predict what the rates will do in the next 18 to 24 months,” Petrillo said. “But of course, nobody projected they’d be at 8% either.”

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Down payment assistance programs help buyers reduce the total amount of their loans, while buyers who submit cash offers can sometimes secure a lower purchase price by promising the seller a quicker close. Buyers who don’t have cash to make the purchase can secure a short-term loan and then take out a traditional mortgage.

While rare, Spector likes to work with sellers willing to offer seller-carry financing. This option can be riskier for the seller, who usually holds the property title or sets a lien against it if the buyer stops making payments.

If both the buyer and seller are veterans, the buyer may be able to assume the seller’s outstanding VA loan balance and pay the difference in the downpayment. The challenge for the buyer is making the larger downpayment and knowing that the approval process is more complicated, Spector said.

The news and editorial staffs of The Denver Post had no role in this post’s preparation.

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