In today’s unpredictable housing reality, it’s safe to say many of those traditional mortgage protocols we’ve all heard and faithfully adhered to in the past might no longer apply. Here are a few entrenched and widely accepted rules that are actually smart to break today in many instances—as well as some smarter moves to consider.
Rule 1. Get a 30-year fixed-rate mortgage
Given interest rates are so high on fixed-rate loans, homebuyers might want to consider the alternative: an adjustable-rate mortgage, or ARM. ARMs tend to have lower interest rates than fixed-rate loans, at least during the earlier years of the loan.
An exit strategy should be in place to refinance to a fixed-term mortgage when rates get lower, or to sell the house.
Rule 2. You have to have a 20% down payment
True, a down payment of 20% typically tells the seller you’re competitive, and it avoids private mortgage insurance, which is assessed because the lender believes the loan carries a risk. But it’s definitely not required.
Many types of loans have low down payment options. There are also a wide variety of federal, local, and private sources that offer assistance and grant programs. They can help potential homebuyers with a down payment, especially programs aimed at first-time buyers.
Rule 3. Don’t ask sellers to pay closing costs
In a seller’s market, it would be considered foolish to even ask for contingencies or for the seller to pay closing costs. However, with mortgage rates so high and buyers dropping out left and right, homes are lingering on the market much longer.
Sellers are adjusting their strategy to meet buyers in this changing financial landscape.
Rule 4. Don’t pay points to buy down interest rates
Traditional advice tells homebuyers not to buy mortgage points to lower their interest rate because it will increase the upfront cost of buying the house.
Right now, in this market, buying points to get a lower interest rate is worth it.
Because discount points are a form of interest you pay on your loan, they’re usually tax-deductible as mortgage interest for the year you buy your home. However, origination points that are basically document fees for your mortgage are not deductible.
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