Wednesday, November 2, 2022
Photo by Leslie Gatrell/The Daily Standard
Fixed-rate mortgages have long been the preferred financing option for homebuyers, but some mortgage lenders have seen variable-rate mortgages grow in popularity as interest rates rise. I got
Mortgage rates have more than doubled in the past year, said Brad Brookhart, assistant vice president, branch manager and loan officer at People’s Bank in Serena.
Prior to this year, fixed-rate mortgages were around 3%, Brookhart said. It’s now jumped to over 7%.
According to the National Association of Realtors, the median mortgage payment in Mercer County in the first quarter of 2022 was $841, up $213 from the median payment of $628 a year ago.
“With considerable inflation over the past few years, it’s no surprise that demand for housing has outstripped supply, making it a seller’s market,” he said. “Until last year, housing prices were rising and interest rates were low.”
A 30-year fixed-rate mortgage has been the most popular financing option for homebuyers for years, Brookhart said.
A fixed rate mortgage has a fixed interest rate, so the mortgage interest rate does not change over the life of the loan.
Variable-rate mortgages, on the other hand, have fixed rates for three to seven years, Mr Brookhart said. He said that during the 30-year period he often sees a five-year fixed rate period.
Mortgage interest rates can fluctuate once the fixed rate period ends. Rates typically change once a year, Brookhart said, and there’s a limit to how much you can change.
“In most cases, interest rates can change once a year, and there is an upper limit to how much they can change each year,” he said. “People are hoping that interest rates will eventually come down and save them money.”
Mr Brookhart said housing prices were rising despite low interest rates until last year. However, he said a lot could change in a year.
“In a low-rate market, I would say eight to nine out of 10 homebuyers would choose fixed rates. Told. “But now about seven to eight out of 10 customers have variable rate mortgages and only two or three of him have fixed rates.”
Interest rates are always in flux, but Brookhart said 30-year fixed-rate mortgages are at around 7% or more, more than double from around 3% last year.
At the same time, bank officials see interest rates on variable-rate mortgages being 1% to 2% lower than fixed-rate mortgages, he said.
For example, according to the National Association of Realtors, the median home price in Mercer County is just under $200,000.
This 1% interest rate differential saves homebuyers $2,000 a year, but Brookhart noted that the amount changes as homebuyers make their loan payments.
“This[variable rate mortgage]is a little more popular now because it saves money,” he said.
Variable-rate mortgages have several advantages besides low interest rates, he said.
Closing costs are often lower for variable-rate mortgages than for fixed-rate mortgages, Brookhart said. Also, there are no prepayment penalties. This means homebuyers can make large payments on their loans without penalties.
In addition, eligible homebuyers can also refinance variable-rate mortgages for fixed-rate mortgages when interest rates finally drop, he said.
Interest rates for 30-year fixed-rate mortgages are expected to gradually decline starting in the second quarter of 2023, according to a mortgage financial forecast released by the Mortgage Bankers Association on October 23.
But Brookhart encouraged potential homebuyers to think before they even consider a variable-rate mortgage.
“Think about how long you’re going to live in that house if you’re going to refinance,” he said. “Definitely worth a visit.”