Buying a home in central Ohio is tough - but here are ways to manage rising interest rates

Mortgage rates have risen to their highest level in a generation, adding hundreds of dollars to monthly mortgage payments and sidelining countless buyers.

The average rate on a 30-year mortgage stood at 7.49% last week, up from 6.66% a year earlier and 2.99% two years ago, according to the federal mortgage agency Freddie Mac. The rate is now the highest it's been since the end of 2000, nearly 23 years ago.

While there's no easy way to avoid the rates, there are ways for buyers to reduce the pain. Here's a look at what the rates mean for buyers and how they might navigate them.

What do mortgage rates cost buyers?

The buyer of a $300,000 home, about the median price in central Ohio, who puts 10% ($30,000) down would pay $1,886 a month with a 7.49% 30-year mortgage. A year ago, the same home, but with a 6.66% interest rate, would cost $1,735 a month, or about $150 less a month.

But compared with two years ago, when the average rate was 2.99%, the difference is dramatic. That same loan would have cost $1,137, or $750 a month less than it costs today. That's a 66% jump in monthly cost in two years for the same house.

What impact have rates had on the housing market?

Home sales in Columbus and throughout the country have dropped since rates started rising the end of 2021. For the first eight months of the year, central Ohio home sales are down 15.4% compared with the same period last year. The drop in August sales was the 15th straight month of sales declines in the Columbus area.

Mortgage applications nationally were 22% lower at the end of September than a year earlier, according to the Mortgage Bankers Association.

“Mortgage applications grounded to a halt, dropping to the lowest level since 1996," Joel Kan, the association's vice president and deputy chief economist, said in a news release. "The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market."

Shop around

The first thing worried home buyers should do is shop around for rates. While the average 30-year-rate is 7.5%, rates can vary by more than a point, and fees can range significantly.

"Shop around; you can find much better deals by comparison shopping," said Greg McBride, chief financial analyst for the consumer finance website Bankrate.com.

Consider an adjustable rate

Adjustable rate loans offer a lower interest rate, typically for the first five years of the loan, then adjust to a market rate. They have become more popular with rising rates and now account for 8% of all mortgages, up from about 5% over the past few years, according to the Mortgage Bankers Association.

One reason they do not account for more mortgages is because they don't offer a big discount now. According to Bankrate.com, the average rate of a 5-year adjustable rate mortgage is 6.63%.

"Adjustable rate mortgages can be a temptation, but there’s little advantage in going that route now," McBride said. "The borrower gets a lower rate but the difference in that rate is pretty scant, yet they still bear all the interest rate risk."

Or have the seller chip in on one

Another version of an adjustable rate mortgage is called a 2/1 buydown. Under this loan, the interest rate is reduced by 2 percentage points the first year of the loan and 1 point the second year before reverting to a market rate. Adam Rose, the senior vice president of Western Ohio Mortgage in Sidney, recommends it because it may be enough to get homeowners over the hump of high rates until they can refinance.

"Let’s say the rate is 7.5%," said Rose, who sits on the executive committee of the Ohio Mortgage Bankers Association. "In a 2/1, the rate would be 5.5% in year one, 6.5% in year two, and in year three, back to market rate. It's buying buyers time for the rate to adjust, then they can refinance."

It's typical for buyers to have sellers pay for the buydown as part of the terms of the purchase contract, Rose said. A 2/1 buydown with a $350,000 loan would cost the seller $8,340.

But getting buyers to kick in that much, or help cover buyers' costs in any way, may be challenging in some markets such as Columbus, where sellers continue to have the upper hand.

"In most areas, the inventory is so limited, sellers don’t have to make concessions," McBride said.

Assume a mortgage

Government-backed mortgages such as FHA, VA or USDA loans, can be transferred, potentially allowing a buyer today to assume a loan with a 2.5% or 3% rate set years ago.

But, buyers still must qualify for the loan and the loan servicer must approve the loan transfer. More significantly, since buyers are only assuming the balance of the loan, they must find a way to pay for the equity in the home. In other words, a buyer who assumes the $200,000 loan balance on a home that sold for $325,000 must come up with another $125,000.

"If there’s a way to make it (assuming a loan) work, certainly it’s worth looking into," said Chris Hiner, director of home lending for Park National Bank, and vice president of the Ohio Mortgage Bankers Association. "If you can get a large percentage of your funds from rates from two or three years ago, it’s absolutely worth looking at."

Buy a new home

Many homebuilders are offering loan discounts to attract buyers. Pulte Homes, for example, is offering a 30-year mortgage of 5.75% (6.1% with fees) to qualified buyers on some inventory homes through the end of the year. Fischer Homes is offering a 30-year conventional mortgage at 5.5% (6.26% with fees) to qualified buyers of certain homes.

"If you're buying new construction, that’s where you can find some of the biggest incentives," said McBride. "I wouldn’t recommend foregoing getting preapproved or shopping around for a better deal, but it's an option that may prove more attractive. Builders are in a position to offer incentives that you won't find otherwise."

Buy down your loan

Buyers can 'buy down' their interest rate. Traditionally, the cost was one discount 'point' (1%) of the loan amount, or $4,000 for a $400,000 loan, for each quarter-point reduction in interest rate.

Some experts consider the cost too high, especially if rates drop in the next few years, allowing homeowners to refinance.

"If I want to buy down a rate, a permanent rate, 1% for a quarter point in interest rate does nothing," said Rose. "I don’t council people now to do a permanent buydown since you’ll refinance again in two years."

But others say it's worth looking into.

"It really depends on the market each day," said Hiner. "The cost could be high or low. I've seen people buy a quarter point down for $500 or $5,000. It all depends. ... If it saves $20 a month and it costs $400, that’s a win."

Look for help

Several government programs are available to reduce down payments and interest rates for certain buyers including first responders, veterans, first-time buyers and college graduates. To explore statewide programs, visit the Ohio Housing Finance Agency website.

Hold off on buying

Finally, there's the option of delaying your purchase, as many Americans already have, until rates are better.

"Now's really not a great time to be buying a house," McBride notes. "Prices are high and financing costs are as high as they’ve been in 20 years. You're not getting a good deal. If you’re stretching your limit, consider waiting a few years … If in that time, you get a promotion, you pay down debt, you increase your credit score, all of a sudden the cost of ownership is more palatable. The novelty of a new house will wear off. The mortgage won’t."

jweikerdispatch.com

@JimWeiker

This article originally appeared on The Columbus Dispatch: How to navigate highest mortgage rates in a generation