Last month we discussed mortgage hacks, and their all-important role in helping buyers overcome the obstacles of the current market—namely high interest rates.
This month, we’re going to expand on that conversation.
In particular, I want to focus on stacking mortgage hacks so you can give yourself an additional leg up in this turbulent environment. More importantly, it will make you feel comfortable diving into a market where most buyers and sellers are taking a “wait and see” approach.
-Shannon
310-853-0335 | ShannonShue@KW.com
PS—YES! That is me standing next to the one and only Gary Keller, at his “Top Agent Mastermind” in Austin, Texas. What a privilege and honor to pick the brain of one of the real estate industry’s best and brightest minds.
The Short Story...
***People continue to sit on the sidelines, discouraged by high prices and high rates.***
***But this “play-it-safe” approach does more harm than good.***
***Sellers want to sell and buyers want to buy RIGHT NOW.***
***The advantage rests with those buyers and sellers who know how to get creative.***
***You can use stacked mortgage hacks to find great deals even in this high-interest environment.***
The Full Story...
We’re only a couple weeks away from the new year and the slowest period in the real estate industry in terms of transaction volume.
That means now is a great time to get clear on what you want, whether you’re a buyer or a seller, and go after it while the rest of the market is asleep at the wheel.
Amazing deals don’t materialize from watching the news, listening to economists, and trying to time the market to perfection. No, the amazing deals materialize from taking action while everyone else is sitting on their hands. If you wait until things feel safe—if you wait to see if certain predictions will pan out or not—you’ll always be behind the eight ball.
With that in mind, let’s examine some of my favorite stacked mortgage hacks so you can feel financially comfortable participating in a market where other buyers and sellers are too scared to play.
Stack a 2-1 buydown with a lock-and-shop to bring down the overall cost of the loan
Interest rate buydowns (i.e., purchasing discount points) are awesome—they give sellers a leg-up over other listings on the market and they let buyers save a nice chunk of change by discounting the initial interest payments and lowering the overall mortgage rate over time.
The “lock-and-shop” hack is also awesome—it allows you to lock-in a pre-approved rate for 120 days while you shop for a property.
But it’s when you stack the lock-and-shop with a 2-1 buydown that you get a super-awesome hack.
Here’s how it might work…
Assume you lock-in an interest rate of 7.625% for 120 days on a $900K loan—your monthly payment would be about $6,475.
If we include a 2-1 buydown:
- Your rate for year one drops to 5.625% and your monthly payment to $5,286.
- Your rate for year two drops to 6.625% and your monthly payment to $5,868
Over the first 24 months of the loan that saves you more than $21,000, which you could funnel back to the lender in the form of “additional payments” to further reduce the cost of your loan over its lifetime. Even by adding one extra payment per year straight to the principal, you’ll see a major decrease in the overall principal balance which reduces the amount of interest you need to pay in the long term.
Stack a 5-1 ARM with an extra annual payments to reduce the amount of interest owed over the life of the mortgage
As a reminder, a 5-to-1 adjustable rate mortgage allows buyers to lock-in an interest rate that’s below the current 30-year fixed rate for a period of five years. At the conclusion of those five years, the rate is allowed to float with the market for the remaining life of the loan—if the rate for a 30-year fixed goes up, so does your interest rate and vice versa. What makes a 5/1 ARM powerful is that it allows buyers to:
- Control monthly costs for a five year window
- Finance a higher amount of the purchase price
- Capitalize on interest-rate hikes that scare more conservative buyers out of the market
So, on its own, a 5/1 ARM is great because it gives you some financial breathing room by allowing you to benefit from lower payments for the first five years of the loan. But where it becomes really powerful is if you make one extra mortgage payment per year. Making these extra payments—especially during the first five years—will save you tens of thousands of dollars over the life of the loan and shorten the duration of the loan.
As an example, by making one extra payment per year on a 15-year fixed loan (6%, $475K borrowed), the buyer shortens the life of their loan by six years and saves more than $150,000 in payments. As long as you can afford it, the payoff for paying a little extra (or more frequently) is huge.
Stack a 15-year mortgage with bi-weekly payments and buyer’s assistance
If you can eat the higher monthly costs, a 15-year mortgage is something of a no-brainer as it allows you to build equity in your home in less time, secure a lower interest rate, and spend less in interest compared to a 30-year fixed. To put it in perspective, the day you pay off your 15-year loan, you’d still owe more than 70% of the principal on a 30-year fixed loan.
But to squeeze even more value out of a 15-year mortgage, stack it by:
- Making payments bi-weekly instead of monthly
- Taking advantage of buyer’s assistance programs
To put the savings in perspective, imagine you took out a $480,000 loan at 6% today.
Making monthly payments, your loan wouldn’t be paid off until November of 2037 and you’d pay a total of $249,092 in interest.
But if you can make bi-weekly payments, your loan would be paid off almost two years faster (January 2036) and you’d save more than $34,000 in interest payments ($214,663).
Factor in some helpful tax credits or down payment coverages courtesy of a home buyer’s assistance program, and your mortgage costs are reduced even further. (My favorite is the mortgage credit certificates that allow first-time buyers to write-off $2,000 of their interest payments every year.)
Stack extra payments with a lock-and-shop
Put plainly, paying a little extra towards your mortgage each year allows you to save big money in the long run. The additional payments go directly towards your principal, which reduces the loan amount and, therefore, accrued interest. Since most mortgage rates are fixed, every dollar of principal you can pay down early reduces the total cost of your mortgage at the end of its term—even an extra $100 per month towards your mortgage payment can shave off thousands and thousands of dollars in interest payments over the life of the loan.
Now if you stack those extra payments with a lower-than-market interest rate that you secured through a lock-and-shop, that’s when you’ll see your mortgage savings explode in the best way possible.
Imagine not only getting a rate that’s 0.25% to 0.75% lower than the market rate at the time of purchase, but also being able to reduce your total interest owed by steadily chipping away at the principal with extra payments.
If such a scenario doesn’t put a smile on your face as a prospective home buyer, nothing will.
Thank you for an incredible year
As the end of the year approaches, I would like to take this opportunity to thank all of you wonderful people for a successful and encouraging 2022.
Despite the ups, the downs, and the oh-so-turbulent mortgage rate hikes, things here in Los Angeles couldn’t be better.
As we move into 2023, I encourage each and every one of you to continue taking part in real estate, whether you’re buying, selling, or simply expanding your knowledge and understanding of the industry. Remember that real estate brings stability and strength to our communities. The more you continue to learn about and engage with real estate, the better and more vibrant our overall economy becomes.
So, with that in mind, let’s set ambitious goals for ourselves in 2023, so that we can continue to grow and prosper together.
Talk with you in the new year!
-Shannon