The Key to Affordable Homeownership!!!

Over the past year, mortgage rates have skyrocketed, reaching levels not seen in years! And at this rate, no pun intended, they’ll make it to the moon before NASA does...Ok, that’s enough with the jokes because this is a very serious topic we’re discussing.

Just to put into perspective how quickly mortgage rates have risen, in 2021 they were at a low of 2.65%, and in 2022 they were at a high of 7.08%. So in a little over a year, mortgage rates nearly tripled!!! Although rates have been much higher in the past, having reached a peak of 18.63% back in the early 80s, they have never risen as quickly as they recently did.

So why did mortgage rates go up?! Well, you can say thank you to the Federal Reserve for causing this mess we’re in…Ok, maybe I’m being a bit harsh because they’re just doing their job, which is to bring down inflation. The main way the Federal Reserve fights inflation is by raising what’s called the “Federal Funds Rate”. Without making this too complicated, the Federal Funds Rate is the interest rate that banks are charged to lend or borrow money from each other.

If the Federal Funds Rate increases, money becomes less available, and short-term interest rates go up, which causes inflation to go down. If the Federal Funds Rate decreases, money becomes more available, and short-term interest rates go down, which causes inflation to go up. If you want a more in-depth explanation of what caused inflation to go through the roof, which led the Federal Reserve to start raising the Federal Funds Rate, you can watch the video I made about this by clicking here.

Now that you have an understanding of how we got to this point where mortgage rates are hovering around 7%, let’s talk about a solution that quite a few of my buyers have been using to help make their mortgage payments more affordable, which is the 1st Time Advantage Direct Loan offered by the Maryland Mortgage Program (MMP).

That’s quite a long name, so I usually just call it MMP’s low-rate loan for short because that’s essentially what this loan provides first-time homebuyers with. Generally, this loan will provide a rate that is around 0.5% less than what the average rate is going for in the market.

Currently, the average rate for a 30-year fixed loan is 6.89%, and the rate for MMP’s low-rate loan is 6.375%. Although it doesn’t seem like it’s that much of a difference, let’s take a look at what the mortgage payment would be at both of these rates. For this scenario, let’s say you’re purchasing a home for $300,000 and you’re putting the minimum downpayment on a conventional loan, which is 3% (FYI, to keep things simple, this isn’t taking into account the other components of a mortgage payment, which are property taxes, homeowner’s insurance, mortgage insurance, and HOA/Condo fees).

For loan #1, which has a 6.89% rate, your monthly payment would be $1,974 a month.

For loan #2, which has a 6.375% rate, your monthly payment would be $1,872 a month.

That’s over $100 that you’d be saving every month just from your rate being a 0.5% less!!!

If you’re still not impressed, let’s take it a step further by looking at the difference in the total amount of interest you’d be paying over the 30 years it’ll take you to pay off your mortgage.

For loan #1, you’d end up paying $398,248.93 in interest.

For loan #2, you’d end up paying $362,566.11 in interest.

So just from your rate being 0.5% less, you’d save over $35,682.82 in interest payments! Imagine all the things you could do with that money you’re saving?! Such as saving up to buy an investment property!

At this point, you’re probably thinking to yourself, “so what’s the catch?”. I mean, there’s NO WAY that you wouldn’t have to pay back MMP for giving you a lower rate…right?! Fortunately, you don’t owe MMP anything other than a fee you pay them at settlement, which is only a couple hundred dollars, but that’s pocket change in comparison to the tens of thousands of dollars you’d be saving throughout the life of your mortgage! And when you go to refinance or sell your home, you don’t have to pay back anything to MMP.

So why in the world would you not use this loan product if you meet all the requirements for it? Well, the max amount your debt-to-income ratio can be is 50%, which may keep you from qualifying in the price range you want to be searching in, and the only other thing I can think of is that it takes a bit longer to settle because MMP has to review your file before you’re given the clear to close. And we know with how competitive the market is, there are sellers out there who will go with offers that are able to provide the quickest close.

Now that we’ve established how awesome MMP’s low-rate loan is, let’s go over what the main requirements are. First of all, you have to be a first-time home buyer, which in the eyes of MMP is anyone that hasn’t owned a home in the past three years. Next up, the income of your household can’t exceed a certain amount, which ranges from $92,500 to $154,420 and it all depends on the area you’re purchasing a home. If you click here you’ll be able to see what the household income limits are throughout Maryland. Lastly, your credit score must be at least a 640, and if you want to max out your debt-to-income ratio to 50%, then your credit score will have to be at least a 680. However, do keep in mind these credit score requirements may vary depending on the lender you go through.

There are a few more requirements to be eligible for MMP’s low-rate loan, but those are the main ones. For more information on what MMP’s requirements are, click here, but to get a better understanding of this loan product, I would recommend speaking with an approved lender with MMP, which I have a few that I can get you in contact with.

Listen, even though MMP’s low-rate loan is currently providing a rate in the low 6s, that still blows when you compare it to rates a few years ago when they were in the 2s. It especially sucks when home prices are still rising. My word of advice to you all is to not get so caught up on what your rate is. What you should be more concerned about is whether or not you’re able to afford your mortgage payment. If you’re able to comfortably afford your mortgage payment where rates are at and you're in the price range you want to be searching in, then don’t hold off from purchasing a home. I’m confident that rates will come down over time. And hey, if they don’t come down for a while, at least you know that you’re able to afford your mortgage and you own an asset that will help you build your wealth over time.

So if you’ve been on the fence about purchasing a home, I’d love to discuss with you whether or not it’s the right time for you to begin your home search. And if there’s anything you’d like to know about the home-buying process, don’t hesitate to reach out to me!