Mortgage Rules You Should Break

In early 2022, mortgage rates were down around 2.5 percent. Today, they’re closer to 7.5 percent. On a 30-year, fixed-rate loan, this means your monthly payment would be up by 77 percent. Talk about financial whiplash!

Even though, historically speaking, interest rates have returned to normal for single family homes (between 6 and 8 percent), the last decade has us all brainwashed into thinking that we can expect rates between 2.5 and 3.5 percent. As a result, the Federal Reserve’s anti-inflationary rate hikes have put a chill on activity in the housing market.

Sellers are holding onto their properties longer because they don’t want to lose the low rate of their current mortgage. Plus, they are hoping rates will go down so they can ask for a higher sale price for their property in the future. As interest rates rise, home prices usually fall.

So, what’s to be done? Well, it might be time to break some rules, or at least, buck conventional wisdom.

30-Year, Fixed-Rate Mortgage? Maybe Not.

Traditionally, people think of a home loan as a 30-year, fixed-rate mortgage. However, an adjustable rate mortgage (ARM) might be a good option because ARMs often start with lower rates, allowing you to buy a more expensive home. The catch, of course, is that the loan’s interest rate can increase as financial markets change.

Beware of getting hooked with a lower rate today and then not being able to keep up with monthly mortgage payments as interest rates rise. Be sure to read the fine print on the terms of your variable rate loan, and don’t be afraid to negotiate limits or “caps” on the amount the rate can increase (e.g., 1 percent per year up to a specific lifetime cap).

ARMs can work well if you’re confident you won’t hang onto this loan for an extended period. If you work for a company that requires you to move every few years, or if you have a chunk of money you’re confident is coming your way that would allow you to pay off your loan, then by all means choose the variable-rate option.

20 Percent Down? Not Necessarily.

Another common belief is that you have to save 20 percent of the purchase price as a down payment to get a decent home loan. This simply isn’t true. Many loan programs allow small down payments. FHA has a loan that only requires a 3 percent down payment, and USDA has some no-down-payment loans. If you are a military veteran, you may qualify for loans with excellent terms.

Down payment assistance programs allow you to either borrow or get a grant for some or all of the down payment. Most of those programs require first-time homebuyer status, which is often defined as not having owned a home for the last three years. To qualify for any home loan, regardless of the down payment, you will need to prove your ability to afford the loan payments. Lenders want verifiable income, a strong credit rating, and assurances that the debt you already have won’t interfere with repaying their loan, among other things.

Who Should Pay Closing Costs? It’s Negotiable.

Common wisdom says, “Don’t ask sellers to pay closing costs.” However, I have never been bashful about negotiating with a seller on whatever terms are appropriate. It may be to the seller’s advantage to pay closing costs, allowing the buyer to get a larger loan so they can pay a higher price for property.

What About Buying Down the Rate? It Depends.

While many people warn against paying points to buy down interest rates, right now it may be worth it. One point is the equivalent of 1 percent of the loan. So, on a $100,000 loan, a point would be $1000. By paying points up front, you can secure a lower interest rate for the life of the loan, allowing you to afford a more expensive home.

One benefit of paying points to buy down the interest rate is that this expense is considered pre-paid interest, which is tax deductible. Paying discount points is more advantageous the longer you keep the loan.

Regardless of any financial maneuvering on your part, a bank will not lend money unless it is confident it will make money on the deal. That’s how banks stay in business. Make sure you understand all the ramifications of your financial decisions before signing on the dotted line.

If you have questions about property management or real estate, please contact me at or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 45 years.

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