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30-year fixed mortgage rate reaches highest sustained increase in 40 years
By Jeff Lazerson
What I think: Mortgage rates are popping faster than a popcorn popper.
According to Freddie Mac the start of 2018 is witnessing the 30-year fixed rate reaching its highest sustained rate increase to start the year in the past 40 years. “Through May, rates have risen in 15 out of the first 21 weeks (71 percent), which is the highest share since Freddie Mac began tracking this data for a full year in 1972,” wrote Freddie Mac’s chief economist Sam Khatar.
“At a time when housing inventory remains extremely low, it's worth watching whether these higher borrowing costs lead some would-be sellers to stay put in their current home," Khatar said. "Inventory shortages would likely worsen if more homeowners decide not to sell out of reluctance of having a new mortgage with a higher rate.”
I think that is code for: only the folks that have to move are likely to move, say for a job relocation, divorce or perhaps retiring and downsizing.
Thankfully, Creative mortgage minds are bridging the rate gap for buyers as well as refinancers who don’t have provable income. And one particularly interesting mortgage allows for second homes and investment properties in addition to your primary residence.
Using up to 90 percent of your business bank deposits over the last 24 months to qualify (most lenders allow just 50 percent of business deposits to be counted as income) a 30-year fixed rate instrument allows you to buy down the rate by one full point without any out-of-pocket expense. Certainly this is unheard of in my experience.
For example; let’s say you are buying a $1 million home and you are putting 20 percent or $200,000 down, leaving you with an $800,000 mortgage balance. The easier qualifying bank statement provides for a 30-year fixed rate at 6.125 percent (most adjustable rate bank statement mortgages are starting in the 5 percent range).
You can buy the rate down to 5.125 for 2 points. You can save your precious cash by financing the buy-down points into the loan balance (again, even on a purchase), not pay private mortgage insurance even though you are now over 80 percent loan-to-value and most importantly, qualify at a lower rate.
Let's compare: $800,000 at 6.125 percent equals a principle and interest payment of $4,861. The 5.125 rate on an $816,000 loan amount offers a principle and interest payment of $4,356, saving you a popcorn-popping $505 per month over the life of the loan.
Take the $16,000 buy-down price (excludes any origination cost) and divide by the $505 monthly payment savings. It takes just under 2 and one-half years to recoup the cost. After that timeline, you are saving some serious bucks.
My advice to every borrower is that if the buy-down can be recouped in less than three years (excluded any tax deductibility), then it's a good deal to be considered.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011