Is 2022 the year you hoped to build your dream home? A custom-built 5000 square foot, four bedroom, two bathroom stunner with a wraparound porch, hardwood flooring, vaulted ceilings, a commercial-grade kitchen with marble countertops and custom cabinetry, floor-to-ceiling windows and a view that is sure to knock your socks off? That sounds lovely.
But if you’re like many Utahns who have been putting money aside to save for a new home, the creeping rise in mortgage rates may be turning your new home-building dream into a nightmare. Fortunately, lenders and homebuilders offer options to help ease the financial strain of rising interest rates. A viable choice to combat high-interest rates is to buy down mortgage points. But what does that mean, and is it a smart idea for your life situation?
What is a mortgage point?
Although the federal government sets the mortgage interest rates for lenders, which currently hovers around 6.5% for a 30-year fixed rate and about 5.5% for a 15-year fixed, borrowers can opt to buy down mortgage points to lower the overall mortgage rate.
Mortgage points are fees paid to lenders to review and process a loan. Typically, points cost around one percent of the total mortgage. So if you plan to borrow around $250,000 for a home, and the lender charges 1.5 mortgage points on that mortgage, the buyer will pay around $4,125 to lower the interest rate on their mortgage.
What are the advantages of buying down mortgage points?
The current financial climate is ideal for considering buying down mortgage rates–on the condition that you plan to provide a big down payment. By buying down points, you are literally lowering your interest rate.
“Buying mortgage points is a way to pay upfront to lower the overall cost of your loan,” explains Libby Wells from bankrate.com. “It makes the most sense if you plan to be in the home for a long period of time. The amount you’ll save each month is likely to make the upfront cost worth it.”
Is there a downside to buying down mortgage points?
To determine if buying down points is a smart choice depends mainly on the buying strategy you plan to use and your plans for the new home. Buying down points is great if:
- You have a large sum of money available upfront to purchase points.
- You plan on staying in your new home for a long time.
- You prefer putting more money down upfront with lower monthly payments.
For some new home buyers, paying the mortgage points in addition to the costs associated with building and financing a new home is just too much to budget. In those situations, it’s wise to take the present interest rate, then apply the money you’ve saved money to the down payment.
“A bigger down payment can get you a better interest rate because it lowers your loan-to-value ratio, or LTV, which is the size of your mortgage compared with the value of the home,” adds Wells. Should interest rates drop, you can consider refinancing your mortgage at a lower rate.
Here’s some good news, there are plenty of luxurious, energy-efficient, comfortable, and desirable home designs to fit any budget. Spencer Stephens Construction has been building the Utah community since 2009. He understands a fluctuating housing market, and he knows how to help people realize their dream in any life situation.
If 2022 is the year for your new home, talking with the experts at Spencer Stephens Construction is a great place to start. Visit buildwithspencer.com for more information.