News > High Mortgage Rates Got You Down? Here's What To Do

published on 2022-10-27

Ah, the good old days when the mortgage rate was in the 3's. Not anymore. Current mortgage rates around 7%, making for a bigger monthly payment for those needing a mortgage right now. However, rents are rising too, so an apartment or rental home is not a good place to hide while you wait to see if rates will come down in the next year. The good news is that there is more on the market for buyers to choose from. Because of that, buyers have some more options than they did in prior years.

So, what can buyers do to take some of the sting out of higher mortgage rates? Here are some possibilities:

Negotiate a Lower Price

The most obvious way to lower payments is to start out with a lower purchase price and finance amount. Contrary to the market of 2021 and early 2022 where the sellers were in a take-it-or-leave-it mood, buyers now have some more negotiating power. Sellers are lowering their prices, and in addition, you may be able to ask for a larger price drop to help with your mortgage payment as well. We can help you determine how low an offer makes sense and when a low-ball offer might work.

As a nice side effect of a lower price, the same down payment amount will lower the amount you will have to finance and thereby lowering your monthly payment even more.

Ask the Seller to Buy Down the Rate

If you plan on staying in the home or condo you purchase for a longer period of time (more than 6-8 years), then you can ask the seller to buy down your mortgage rate. Lenders work in terms of "discount points", with one point being 1% of the purchase price. One point usually can reduce the interest rate by .25%. So for example, if your mortgage amount is $320,000, the lender may reduce your mortgage rate by .5% in return for 2 points, or $6400. The seller can contribute this amount in lieu of lowering the price further.

If you don't plan on staying in the home or condo for more than 6 years, you can also consider having the seller buy down the mortgage rate for just the first 2-3 years. This eases the monthly payment pain in the short term after which you could hopefully either refinance at a lower rate or "grow into" the higher rate if you decide to stay in the home. So for example, if the current mortgage rate is 7%, your interest rate could start at 5% for the first year, increase to 6% for the second year, and move back to the 7% rate in the third year.

Get an Adjustable Rate Mortgage

That's right, ARMs are back! In the 2000's ARMs wreaked so much havoc, especially when combined with low down payments, because once the rate reset to the higher amount, buyers couldn't handle the increased payments and banks had to foreclose. That doesn't mean it's a horrible idea now. ARMs offer you lower rates for the first few years and then after that they usually adjust yearly to the prevailing mortgage rate. If you think you may sell or refinance before the rate adjusts and you feel comfortable with a higher mortgage cost "just in case" you don't sell, then an ARM may save you some money for the first few years. ARMs are a way to "marry the home but date the rate," as the common saying goes. However, it's a riskier move as compared to buying down the rate.

Which strategy you use depends on how long you plan on staying in your new condo or home, how important a drop in monthly payment is for you, and whether you feel strongly about interest rates dropping in a few years.

Your mortgage broker can help you decide which option is better for you (we have several responsive and competent lenders to recommend!) But most importantly, you'll want to make sure that whatever monthly payment you decide on, that it fits into your overall budget. After all, home ownership should feel good, not stressful.

 

Though not guaranteed, information and statistics in this article have been acquired from sources believed to be reliable.

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