In a Year of Rising Interest Rates
We are in a year of rising interest rates. According to INMAN, “In the first of what economists predict will likely be three adjustments in 2018, the Fed called for a 25 basis point increase, and a fed funds rate of 1.63 percent, at the conclusion of the Central Bank’s two-day Open Market Committee meeting. The new benchmark rate is the highest since September 2008, near the beginning of the housing crisis.
The movement of the Fed rate — up or down — can put pressure on mortgage interest rates, which often follow the lead of the 10-year Treasury note, otherwise known as the “long bond.” Freddie Mac’s Primary Mortgage Market Survey reports the average 30-year fixed rate hovering at 4.44 percent, but Wednesday’s benchmark rate hike has already been folded into current mortgage rates, Greg McBride, chief economist of bankrate.com, told USA Today.
In a Year of Rising Interest Rates
Current rates are still considered historically low compared to pre-recession levels. In the year 2000, for example, the average 30-year fixed rate stood at 8.21 percent, and in 2007 it hovered at 6.22 percent, according to Freddie Mac. But Steve Rick, chief economist of CUNA Mutual Group, also said in an interview with USA Today that additional increases throughout the year could push the 30-year fixed as high as 5 percent by December.
Buying down the rate
With rising interest rates, you might want to consider buying mortgage points or as some call it, buying down the rate. Points, also known as “discount points,” are fees paid directly to the lender at closing in exchange for a reduced interest rate. A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).
Let’s take an example of a $300,000 mortgage. Assume a lender offers you a rate of 4.5%. Each point, in this case, is $3,000. If you bought a 3 point discount for $9,000, you would reduce the interest rate by about ¾ to 3.75%. The points would be in addition to your down payment and closing costs. Here is a link to buying down the rate calculator.
Discount points are prepaid interest.
“Most lenders provide the opportunity to purchase anywhere from zero to three discount points. Buying discount points can decrease your overall mortgage payments. It is important to note, however, that when lenders advertise rates, they often show a rate based on the purchase of points. These points may be tax deductible. Consult your tax preparer before making the decision about buying down the rate.
Should you buy points?
you need to decide how long you will live in the house. You want to look at the cost of the points and how much a month your mortgage payment will go down, Suppose, you could save $131 a month by buying down the rate. Dividing $9,000 by $131 per month equals 68 months. Sixty-eight months is five years and eight months. That’s a good deal for you if you plan to live in the house for some time.
Then you must decide if you have the money in addition to the down payment to buy down the rate. Some first time home buyers barely have the money for the down payment and the monthly payment. If the payment is just too high and you can’t buy down the rate, you might consider if your eyes are bigger than your stomach as mama used to say.
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