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LOS ANGELES: Mortgage rates are more than double what they were a year ago, so many homebuyers are looking for ways to take some of the pain away for years to come.
The trend has driven adjustable-rate mortgages, or ARMs, to their highest use in more than a decade.
A recent snapshot by the Mortgage Bankers Association showed that ARMs accounted for 12.8% of all home loan applications in the week ending October 14. The last time these loans made up a large portion of all mortgage applications was in the first week of March 2008. ,
ARMs represented only 3.1% of all mortgage applications at the beginning of the year. The average rate on a 30-year fixed-rate mortgage at the time was 3.22%, while last month the rate topped 7% — the highest since 2002.
This week, the average rate for a 30-year mortgage fell to 6.58%, according to Mortgage Buyer. Freddie Mac, A year ago it was 3.1%.
The sharp rise in mortgage rates follows a sharp rise in the yield on the 10-year Treasury note, which climbed amid expectations of higher interest rates overall as the Federal Reserve hiked its short-term rate to quell peak inflation. Is. decade.
As mortgage rates rise, they can add hundreds of dollars to monthly mortgage payments. This is a significant deterrent for many prospective homebuyers, resulting in a housing slump this year. Last month, sales of pre-occupied U.S. homes fell for the ninth month in a row. Annual sales are running at the slowest pre-pandemic pace in more than 10 years.
For house hunters still able to afford a home at current high mortgage rates, lowering their monthly payments for the first few years with an adjustable-rate loan can help give them financial flexibility.
A homebuyer who takes out a typical 5/1 ARM, for example, will have a low, fixed rate for the first five years of the loan. After that, the loan moves to an adjustable interest rate, which can be higher or lower, until the loan is paid off or the buyer refinances the loan.
Another approach that has become popular recently is reducing the interest rate on a 30-year fixed-rate loan for the first two or three years.
Lowering the rate on a 30-year mortgage could make monthly payments more manageable – both homebuilders and homeowners are offering to entice buyers as the housing market slows.
Let’s say a borrower takes out a 30-year mortgage with a 6% fixed rate. With what is known as a 3-2-1 rate buydown, the homebuyer’s interest rate will be 3% in the first year of the loan, 4% in the second and 5% in the third, potentially saving them thousands of dollars. ,
However, the buyer must still be eligible for the full monthly payment before the buydown adjustment.
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