By: Eric Barnette, VP of Mortgage Lending
As we all know, interest rates have been climbing for a year now and while they are 2x higher than they were earlier last year, they are remarkably still around the 100-yr average for mortgage rates. So, while 6.5-7% sounds high compared to 2.5-3% we had in 2020-early 2022, this is not at all uncommon. For perspective, interest rates in 1985 were in the double-digit range, even for adjustable rate mortgages!
Due to the increase in interest rates, the real estate market has started to slow down. Gone are the days where buyers had to get into bidding wars – or worse, offer a premium over and above the listing price just to get an offer accepted. While there still isn’t the inventory that we would like, values are starting to trend down. Unfortunately, as interest rates rise, pre-approvals either dry up or the amount that you were originally pre-approved for may have changed due to these higher interest rates. As a result, there is a lot of publicity starting to come out about an alternative to these higher interest rates – the 2:1 Buydown.
What is that, you might be asking? It is where you pay a certain percentage of your loan amount (called points) at closing in return for a lower interest rate for the first year, then a slightly higher interest rate in year 2 before the rate goes, in year 3, to what it was today and stays there for the remainder of your loan. So, for example, the 30-yr fixed rate is at 7% today, you would pay around 2.5% in points at closing in return for your first year’s interest rate being at 5%, then the second year would be at 6% and finally, in year 3, the rate would go to 7% and stay there for the remaining 27 years of the loan (or until you pay it off). Most people are being told that this is a good option if the seller is willing to kick in some money from the transaction towards your closing costs.
I’m here to offer you a better solution than that. It’s a balloon mortgage, where the interest rate is fixed for the life of the loan WITHOUT having to pay for any points to get the lower interest rate AND the rate doesn’t gradually go back up over the next 2 years. A balloon mortgage is where you have a shorter period of time for the note (length of the mortgage term) but the payments are amortized (or spread out) over a period of time that can be as long as 30 years. The rates on these loans are lower than what you can presently get on a fixed mortgage and we also offer an option where you can convert these types of mortgages into fixed rate loans at any time during your balloon period without having to have a new appraisal done. If the balloon matures before rates go back down, then you can just renew it for another period of time and continue on.
So, if you are looking for a better alternative to fit your family’s needs in terms of a mortgage, instead of paying (or using money the seller is giving to you for your closing costs) look at the Balloon Mortgage and save yourself some undue headache over the next couple of years, only to be back where you are right now. United Financial Credit Union is here, looking out for your best interests both now and into the future. Contact the Mortgage Department to see what product best fits your situation.