With rates jumping up a year ago from the low 3’s to now hovering around 7%, it’s hard to make choices. I’ve been in the mortgage business since 1993 when interest rates had dropped to 7% from the 12% rates we struggled with when I first got my Realtor’s license.
Three things helped then and now. First, interest rate buydowns. It’s just a simple way to get help paying your mortgage, help in adjusting to the payment shock. If you’re going from a 3% to a 7% mortgage, there will be shock. A buydown can help.
When you buy down the payment, you’re just paying it in advance. The advantage of doing this at loan closing is you can ask the seller to pay part or all of the buydown fee. Let me explain. Say you have a $400,000 mortgage at 7%, and your ingenious Mortgage Loan Officer tells you you can do a 3-2-1 buydown. What does that mean?
Year 1, your mortgage payment will be as if you had a 4% interest rate. That’s 7-3 for year one. Year two will be at a 2% buydown, in effect a 5% rate, and year three will be one percent or 6% payment. How we do this is to take the difference in monthly payments between the note rate of 7% and the bought down interest rate and put that difference into an escrow account. Part of your new monthly payment comes from you and part from the escrow account, totaling a 7% payment all along. The important part is that the Seller or even the lender can contribute some or all of that money needed in setting up the buydown escrow account when you close your loan.
Example:
$400,000 Mortgage at 7% for 30 Years with 2% ($400,000 X 2% = $8,000) Seller Help.
Total buy down fee is $18,342 – ($8,000 Paid by Seller, $10,342 paid by you at closing.)
Year 1 Monthly Payment = $1,909.66
Year 2 Monthly Payment = $2,147.29
Year 3 Monthly Payment = $2, 398.20
Year 4 Monthly Payment = $2,661.21 (Years 4-30)
You can also do a 2-1 buydown, same principle. It just gives you breathing room.
Another consideration in this interest rate environment is the renovation loan. Two reasons. First, you can dramatically lower one of the two factors, interest rate and sales price, that affect your monthly payment. Renovation mortgages (full disclosure, I’m a Renovation Specialist and partial to the benefits I’ve seen) allow you to increase the value of properties in need of fix up or modernization. My clients have added square footage and amenities to properties that lagged behind their neighbors in improvements and have increased the property’s value. Sometimes, the property has the size, it just needs upgrades.
The bottom line is a renovation mortgage can help you to create equity in your property and often move in at a lower sales price (total acquisition cost) than your neighbors. Second, a renovation mortgage may allow you to increase the value of your current home enough to offset the rise in monthly payments of moving to a newer upgrade.
The third option is to become a landlord. Have you seen the Accessory Dwelling Units (ADU’s) being sold on Amazon? Prefabricated homes for seemingly reasonable prices. You can google how much in addition to the home’s price (think $100,000+) it will cost in your area to put these small homes onto your property with utilities attached.
Let’s say your 3-bedroom ADU costs $150,000 complete. If you took out a mortgage at 7.45% for 30 years, that’s a principal and interest payment of $1043.69. Add in your total monthly cost (landlord insurance, etc.) and let’s say your total monthly outlay for your new ADU or renovated basement is $1,500. If you’re in a neighborhood where 3 bedrooms rent for $2,000 and above, that’s another way to offset that rise in monthly payment. Sure, in a way, you’re sharing your new living space with another family, but if that helps you pay off your mortgage sooner, it may be worth the sacrifice. Also consider keeping your current home, adding an ADU, and renting both.
