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In 2020, 2021 and even the beginning of 2022, homebuyers have been able to enjoy unbelievably low mortgage rates when buying a Denver home, often breaking below 3% annually. This was due to what is often referred to as easy money policies from the government during the global pandemic period. However, as the world is working on navigating life after the pandemic, interest rates have taken a steep climb in the opposite direction with many buyers seeing rates above 6% today. With interest rates coming in at and even below the 3’s for such a long period of time, this has been accepted as the new norm. This is creating a sense of sticker shock when looking at today’s new rates for homebuyers and even causing many to be priced out of the market.
When buyers experience this shock, we often see new loan programs emerge to try and reduce the shock for homebuyers. These programs might include an adjustable arm, buydown options, payments that are lower during the beginning of the loan period and then automatically adjust on year 2, 3 or 4 or loans that provide a free massage and coffee for a month. Okay, so maybe that last one isn’t real, but the others definitely are. With these creative, less traditional loan programs come some risks to buyers, risks that at TK Homes, we want to make sure you understand.
The sole purpose of these loan programs is to give borrowers a lower monthly payment today. They play off the current sticker shock of the higher interest rates. Then they sell the idea that either you’re going to be able to refinance into a lower fixed mortgage rate when the rates come down, OR your income will be higher, so the higher payments in the future will not be a problem. The issue is that neither of these two situations is guaranteed.
The previously low interest rates were fueled by policies set into place due to the pandemic; if it wasn’t for the pandemic, we would have no reason to believe that interest rates would have ever dropped so low. Now, could they drop below the current mid to high 5’s and low 6’s, sure, but they will likely not be back down in the 3’s and below anytime soon or even ever. Recent Fed meetings have indicated that the cost of borrowing money is not likely to be coming down anytime soon due to the current high inflation numbers. So, even seeing lower 5’s or 4’s, which historically would still be great interest rates, might not happen for some time. The problem is, we won’t know this until rates are in this range, and by then, you’ve already locked in your loan program and stuck with its terms, for better or worse.
The second idea that you’ll be earning more when the cost of your mortgage rises could very well be true; this could be due to a job change or annual raises. However, this is not guaranteed. Plus, it’s a very common fact that as income increases, so do your monthly expenses, whether this is due to a new car payment, extra food budget or just general cost of living, which is completely out of your control. So, naturally, every year your expenses are increasing alongside your income, potentially never giving you a noticeable increase in income to offset that guaranteed adjusted higher mortgage payment.
Because of these two points above, we would like to caution Denver homebuyers when considering these types of loan programs. We are not saying they should be ignored; however, we are saying that you should choose them with all the facts in mind. You also need to make sure you fully understand the loan program, including by how much and when your monthly payment is going to be going up. I would encourage you to figure out a way to ensure you’re constantly remembering when your rates/payment is going to be going up. If the goal is to refinance into a fixed loan program before the change in payment, make sure you’re checking in with a trusted lender regularly to know when the best time to refinance is. This might be at a higher rate than you currently have but below the rate of the adjustment. These loan programs are available and could be a huge money saving opportunity if they are used correctly and with caution.
If you have questions about a loan program, at TK Homes, we are happy to provide basic mortgage knowledge and put you in touch with a trusted lender who is ready to provide the best loan programs for your needs now and in the future. With new higher interest rates and a slower market, it’s important to take time to understand your financing now more than ever.
~ Written by CEO/REALTOR® Trevor Kohlhepp
**TK Homes and its team members are not licensed financial advisors or mortgage professionals. This is not financial advice; all specific financial questions should be asked to mortgage professionals and/or financial advisors.