This regular sponsored Q&A column is written by Eli Tucker, an Arlington-based real estate agent and Arlington resident. Please email him your questions for response in future columns. For video summaries of some articles, see the Ask Eli, Live With Jean playlist on YouTube. Enjoy!
Question: Are there any good ways to lower my interest rate?
Answers: I probably don’t have to spend time enlightening you on how high interest rates have gotten in the last 6 months (they’ve more than doubled in most cases), but we’re now seeing interest rates in the top 5% to mid 6% Spread on most loans. Unfortunately, the current economic environment makes it more likely that rates will continue to rise, and most lenders I speak to tell me they expect rates in the 7% to 8% range later this year.
While there’s not much you can do to significantly change your rate, there are some strategies you can use to help, just like there’s not much you can do about the price of gas. I spoke to Jake Ryon ([email protected]) of First Home Mortgage on things he recommends to lower your rate.
Consider ARMs (Adjustable Rate Mortgage)
ARMs got a bad rap during the housing crisis because many borrowers didn’t understand the terms of their loan. Some of these options allowed for negative amortization, so borrowers who opted for the lowest interest rate ended up owing more on their loan than when they started. Many of these options and the sometimes predatory approach to lending have been banned, so the ARMs you see today are a distant cousin of the ARMs of the housing crisis.
What is an ARM?
In simple terms, an ARM is a loan with an interest rate locked in for a set period (usually 5, 7, or 10 years) and allowed to adjust (up or down) based on market interest rates after that set period. The interest rate will continue to adjust up or down based on market interest rates, with limits on how much an interest rate can change each year and throughout the life of the loan.
Why should you think about it?
In the current interest rate environment, you typically see lower interest rates on an ARM than on a traditional 30-year fixed-rate mortgage. The difference can be around 0.5-1%, which means a significant saving in interest payments.
What about the risk?
The risk of an ARM is that if interest rates remain high or rise at the end of your vesting period, your interest rate will adjust upwards. The risk you’re taking (based on historical interest rate trends, it’s a good bet) is that rates fall enough to justify refinancing into a lower 30-year fixed rate before your ARM lock-up period expires.
In the last few years, when interest rates were so low, ARMs didn’t make sense because they were so close to a 30-year fixed rate (sometimes higher) that you didn’t know much about their usefulness until recently, when the spread came have heard between the two has increased.
Buy Origination Points
In most cases, you can buy “points” on your loan to lower the interest rate. One point equals 1% of your loan amount and for a while you saw a rate cut of about 0.25% for one point. In the current interest rate environment, buying a point can lower your interest rate by as much as 0.5-0.75%.
Discuss this with your lender in advance so you know if you should budget extra money to lower your interest rate. Your lender can also calculate the breakeven point for that investment, which essentially calculates how long you need to stay in the loan (own the property) for the money saved on interest payments to exceed the amount you paid for the point .
Sorry if this seems obvious, but in years when interest rates were so low, many shoppers chose to deposit less money even when they had more funds on hand because the cost of borrowing was so low they felt they could use the extra money more effectively in other savings/investment vehicles.
This financial strategy is no longer as attractive and using as much down payment as you can muster is gaining favor in financial advisory circles. Generally, you get the best interest rates with a 20-25% down payment, beyond that there is little improvement. However, it can still make financial sense to invest more money, even if it doesn’t lower your rate, because the interest payments on borrowed money are so high now.
There are still many loan options for buyers with less (3-5%) to pay, but these interest rates have skyrocketed, leading to higher mortgage insurance premiums.
It’s now even more important to have pre-approved and open discussions with a trusted lender when you begin your home search (here’s a link to an article I wrote about choosing a good lender). If you have any questions about finding a lender or would like recommendations, don’t hesitate to email me.
If you want to talk about buying, selling, investing or renting, don’t hesitate to contact me at [email protected].
If you would like a question answered in my weekly column or if you would like to talk about buying, selling, renting or investing please email [email protected]. To read one of my older posts, visit the blog section of my site at EliResidential.com. Call me directly at (703) 539-2529.
You can find video summaries of some articles on YouTube at Ask Eli, live with Jean playlist.
Eli Tucker is a licensed real estate agent in Virginia, Washington DC and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460