Last week, I said that mortgage interest rates remain on a downward trend, despite some recent decline.
The 30-year fixed rate was roughly below 6% when the Fed announced the rate cut. The “news selling” event led to a slight rebound in interest rates.
Then a hotter-than-expected jobs report days later pushed the 30-year interest rate to 6.5% and interest rates continued to rise from there.
They are now closer to 6.625% and have reignited fears that the worst may not be over yet.
Whether that’s true or not, you can’t get a low price like you could just three weeks ago, and that makes a temporary purchase attractive again.
You will not be able to get your money back with a permanent purchase
While some homebuyers and mortgage refinancing companies were able to hold interest rates below 6% in September, many are now looking at rates closer to 7% again.
This has made mortgage rates unattractive again, especially since there aren’t many low-cost options these days, such as adjustable-rate mortgages.
You’re basically stuck with a fixed 30-year commitment that’s not worth keeping for anywhere near 30 years.
And you pay a premium for it because the rate will not adjust for the entire term of the loan.
One option to make it more palatable is to pay discount points to get a lower price to begin with.
But there is one major downside to this. When you buy a discounted price with discount points, this is the case permanent. This means no money back if you sell or refinance early.
You actually need to hold the loan for X amount of months to break even on the initial cost.
For example, if you pay one mortgage point when closing on a $500,000 loan, that means that $5,000 must be recouped through lower mortgage payments.
If rates drop six months after you get your home loan, and you refinance, that money won’t be back in your pocket.
It’s gone forever. Obviously, this can be a very frustrating situation.
Is it time to think about a temporary purchase again?
The other option to get a lower mortgage rate is a temporary buyout, which as the name suggests is just that temporary.
Often times, you get a lower interest rate for the first 1-3 years of your loan term before it reverts to a higher interest rate.
While they are portrayed as high risk because they are closer to an adjustable rate loan, they can still bridge the gap to lower interest rates in the future.
Perhaps more important is the money spent on the temporary purchase Refundable!
Yes, even if you decide to buy the loan temporarily, and then refinance or sell after a month or two, the money will be added to your outstanding loan balance.
For example, if you have $10,000 in temporary purchase funds, and a sudden drop in interest rates makes sense, you can benefit without losing that money.
Instead of simply eating up the remaining funds, the funds are typically used to pay off the mortgage, as shown in Fannie Mae Chart above. Let’s say you have $9,000 remaining in your temporary purchase account.
When you go to refinance, the $9,000 will go toward paying off the loan. Therefore, if the outstanding loan amount is $490,000, it will be reduced to $481,000.
Interestingly, this may make refinancing cheaper as well. You will now have a lower loan amount, which may push you into a lower loan-to-value (LTV) category.
What are the risks?
To sum things up, you probably have three options when getting a mortgage today.
You can use an ARM, although the discounts are often not as great and not all banks/lenders offer them.
You can just get a 30-year fixed installment and pay nothing at closing for a slightly higher rate, with the goal of refinancing sooner rather than later.
You can pay discount points at closing to buy at a lower rate permanently, but then you will lose money if you sell/refinance before the break-even date.
Or you can make a temporary purchase, enjoy a lower rate for the first 1-3 years, and hope to refinance into something permanent before the rate goes up.
The risk with ARM is that the price eventually adjusts and may be unsuitable. As mentioned earlier, they are also hard to get at the moment and may not offer a huge discount.
The risk with a standard no-cost mortgage is that the rate is higher and you could be stuck with it if rates don’t come down and/or if you’re unable to refinance for any reason.
The risk of always buying the dip is that interest rates may continue to fall (I think) and you will leave money on the table.
The risk of a temporary purchase is somewhat similar to the risk of an ARM in that you may still be stuck with a higher rate for the security if rates do not decline. But at least you will know what the price of this note is, and that it cannot rise any higher.
Read on: Temporary buyouts versus permanent mortgage rates
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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