Some homebuyers are facing ‘payment shock.’ Ways to save on a

Even with signs that the housing market is cooling, homebuyers are still feeling the sting of elevated prices and higher interest rates.

The average rate on a 30-year fixed-rate mortgage is 6.7% as of Friday, up from 3.3% at the start of 2022, according to Mortgage News Daily. Alongside that, home prices — the median is $435,000 — are up 13.1% on average from a year ago, according to Realtor.com.

“I think the major problem is payment shock,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker based near Philadelphia. “When I sit down with clients and the rate is in the 6s, their payment is outrageous sometimes.”

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The difference that interest rates make can be significant. For illustration: On a $300,000 mortgage at 6.5% over 30 years, monthly payments for principal and interest only would be $1,896. That same loan at 3% would result in a payment of $1,264 (a savings of $632 monthly). Other charges such as property taxes or mortgage insurance would be on top of those monthly amounts.

Yet there are ways to reduce the cost of buying a house. While there’s no one-size-fits-all approach, you can evaluate various options available to you and consider whether any of them make sense for your situation.

Here are some options.

An adjustable rate mortgage may be worth considering. With an ARM, as it’s called, the appeal is its lower initial rate compared with a traditional fixed rate mortgage.

That rate is fixed for a set amount of time — say, seven years — and then it adjusts up, down or remains the same, depending on where interest rates are at the time.

While there’s a limit to how much the rate can change, experts recommend making sure you’d be able to afford the maximum rate if faced with it down the road. As illustrated above, a few percentage points can make a big difference in the monthly payment.

Keep in mind, though, that at any point before the rate adjusts, you may be able to refinance your mortgage, said Rinaldi.

Or, if you anticipate moving before the initial rate period expires, an ARM may make sense. However, because life happens and it’s impossible to predict future economic conditions, it’s wise to consider the possibility that you won’t be able to move or sell.

Additionally, if the ARM rate isn’t much lower than a fixed rate, the savings may not be worth the uncertainty. Rinaldi said that while some lenders aren’t offering much in the way of a discounted rate, he’s finding some that are about one percentage point or more lower.

While the typical mortgage is for 30 years, a shorter loan with a more favorable rate may be appealing. The average rate for a 15-year loan is 6% as of Friday, according to Mortgage News Daily….