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High mortgage rates provide relief for homebuyers

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LOS ANGELES (AP) — Mortgage rates are more than double what they were a year ago, so many homebuyers are looking for ways to avoid a few years of pain.

The trend has made floating rate mortgages, or ARMs, the most used in more than a decade.

A recent snapshot from the Mortgage Bankers Association showed that ARMs accounted for 12.8% of all home loan applications in the week ending Oct. 14. The last time these loans accounted for a large portion of all mortgage applications was in the first week of March 2008.

ARMs accounted for just 3.1% of all mortgage applications at the start of the year. The average rate on a 30-year fixed rate mortgage was 3.22% at the time, up from 7% last month – the highest since 2002.

This week, the average interest rate for a 30-year mortgage fell to 6.58%, according to mortgage buyer Freddie Mac. A year ago that was still 3.1%.

The sharp rise in mortgage rates follows a sharp rise in 10-year Treasury yields, which rose amid expectations of higher interest rates in general as the Federal Reserve raised short-term interest rates to quell peak inflation. is of. decade.

As mortgage rates rise, they can add hundreds of dollars to monthly mortgage payments. This is a major deterrent to many potential homebuyers, leading to a housing crisis this year. Last month, sales of pre-occupied US homes fell for the ninth straight month. Annual sales are at their lowest pre-pandemic pace in more than 10 years.

For home hunters who can still afford a home at today’s high mortgage rates, lowering their monthly payments with a variable rate loan for the first few years can help them gain financial flexibility.

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For example, a home buyer who takes out a typical 5/1 ARM will have a low, fixed interest 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 lately is to lower the interest rate on a 30-year fixed-rate loan for the first two or three years.

Lowering interest rates on a 30-year mortgage could make monthly payments more manageable — homebuilders and homeowners alike are offering to entice buyers as the housing market slows.

Let’s say a borrower takes out a 30-year mortgage with a fixed interest rate of 6%. In what is known as a 3-2-1 interest rate buyout, the home buyer’s interest rate will be 3% in the first year of the loan, 4% in the second, and 5% in the third year, potentially saving them thousands of dollars . ,

However, the buyer must still be eligible for the full monthly payment before the lump sum adjustment.

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