It’s gonna happen. Interest rates for home loans (and everything else) are going to rise. Again.
The most recent bump was earlier this month when the Federal Reserve hiked rates by a quarter of a percentage point. That’s good, considering. But policymakers could raise rates to 5-5.25% or more by the end of this year, with no rate cuts predicted until 2024.
“A quarter of a percentage point may not sound like much, but it adds up when it comes to the life of a loan,” said James Samsing, vice president and buyer expert with Offerpad Home Loans (OPHL). “For example, a .25% change on a $300,000 mortgage increases your monthly payment by $50 a month and means you’ll pay $1,500 more in interest over a 30-year term.”
That’s why, he says, potential home buyers should start shopping now for loan programs that can actually help them get a jump on rising rates – and protect themselves from them.
How to reduce your interest rate
The good news is as the U.S. housing market continues to correct itself and buyer concerns over rising rates drive home prices lower in some markets, the traditional spring home selling season is already warming up with win-win options for both buyers and sellers.
While it’s definitely not the seller’s market it was this time last year, it’s not exactly a buyer’s market — yet.
“It seems we have already reached the bottom of the low home sales activity,” says Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS. “And with mortgage rates stabilizing near 6%, we expect the housing market to turn around in 2023 … and rebound in 2024.”
And while sellers may still have more options, they should be cautious about the number of homes falling out of escrow recently because some still continue to demand 2021 prices. (Want to skip all that hassle and worry about offers with mortgage contingencies? Request an all-cash offer from Offerpad instead of listing.)
For buyers, mortgage companies and lenders like OPHL are helping wannabe homeowners with interest rate protection, buydown and other programs to help them stay in the hunt for a new home. And still afford one.
Here’s how three of today’s most popular programs work.
Lock & Shop Interest Rate Protection – Once you’re prequalified or preapproved for a loan, Lock & Shop programs let you lock in your interest rate for a certain time period while you look for a home. This keeps your rate from going up between the time you apply for a mortgage and when you close.
Offerpad Home Loans lets you lock in your best rate for up to 90 days. That way you can take your time finding a home without worrying about rising interest rates raising your monthly mortgage payment. And bonus! Included in OPHL’s Lock & Shop program is a free, one time ‘float-down’ option. That means if rates go down while you’re locked in, you could get an even lower rate.**
Mortgage Rate Buydowns – A mortgage rate buydown is when you ‘prepay’ a one-time fee to get a lower interest rate on of your mortgage for the first year (or more). With a buydown, you typically pay discount points (also known as mortgage points) at closing. The big advantage here is you can get a lower rate, regardless of your credit score.
On average, each mortgage discount point costs 1% of your total loan amount and lowers the interest rate on your monthly payments by .25% percent. Say your mortgage is $300,000 and your interest rate is 3.5%. One point would cost $3,000 and lower your monthly interest to 3.25%.
Doing a buydown with OPHL is a great option for homebuyers who expect their income to continue to increase while they’re paying a mortgage. (Remember, your loan rate and monthly payment could go up after the initial buydown period expires.) To avoid paying the extra upfront cost of buying down your rate, negotiate with the seller to have them pay for it.
Interest Rate Rollbacks – Basically another type of buydown program, some lenders currently offer rate rollback programs. You may find rates a couple percentage points below current fixed rates that are paid for by the lender and home seller, so the buydown doesn’t cost you anything (e.g., no points to pay at closing). These programs allow you to take advantage of a lower rate for a limited time, usually one to three years.
So what happens if rates go down after you buy a home? Offerpad Home Loans has you covered. With our Interest Rate Rollback Protection program, if rates drop, we’ll refinance your loan with zero lender fees.*** And if rates go up? No worries. You’re already locked into a low rate, so you’re protected.
Start by getting prequalified
Now that you know there are ways you can get ahead of rising interest rates, first step in your search for a home is to get prequalified for a mortgage. Offerpad Home Loans makes it easy. Just fill out the simple online application form to find the home loan program that best fits your circumstances and budget.
In addition to the rate protection and reduction programs above, OPHL can also help first-time and other home seekers get mortgages with:
- FHA/VA/USDA/conventional mortgages
- Down payment assistance programs
- Mortgage insurance avoidance with as little as 10% down payment
- Jumbo loans up to $3.5M
- Bank statement loans for self-employed borrowers
Happy house hunting!
*Offerpad Lock and Shop program available only in states where Offerpad Home Loans is licensed to operate. Offerpad Home Loans is currently available in Alabama, Arizona, Colorado, Florida, Georgia, South Carolina, Tennessee and Texas. NMLS #2087710. Terms and conditions apply. Speak with your Offerpad Mortgage Loan Officer for details.
**Loan application must be submitted to underwriting before rate lock expires.
*** All loans subject to credit approval. Loans cannot be refinanced within 6 months of origination.