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Which main type of mortgage is right for me?


While mortgage rates are falling, they are still much higher than a year ago, making homebuying challenging in South Florida. There are ways to make the monthly payment more affordable through adjustable-rate loans and rate buydowns.

After peaking at just over 7% in November, the average rate on a 30-year, fixed-rate mortgage had dropped by nearly a percentage point in mid-January, according to Freddie Mac. Signs are that it and those on adjustable-mortgages, or ARMs, will continue to fall.

That offers some relief to buyers because homes prices are still rising in the region. In November, the median sales price was $550,000 in Miami-Dade County and $540,000 in Broward County, according to Realtor associations.

With a 10% down payment on a 30-year, fixed rate loan at 6%, the mortgage payment would be $2,968 in Miami-Dade and a near-identical $2,914 in Broward. That does not include mortgage insurance, property taxes and homeowners’ insurance, each of which is also paid monthly.

There are ways to lower your mortgage payment. First, consider an ARM. There are many types, but they all work the same: You start with a lower rate that can be adjusted after an initial time period as short as 6 months or as long as 7 years. The rate, which is tied to a publicly published index, can go up or down every 6 months or 1 year once the adjustment periods begin.

ARMs start off less expensive, with an average rate of 5.41% in mid-January, according to Freddie Mac. Using that figure, the initial monthly payment on a 5/1 ARM would be $183 less than on a fixed-rate mortgage on homes bought in Miami-Dade and Broward counties.

Tropical Financial Credit Union offers a 5/6 ARM with the rate guaranteed not to change for the first five years and adjust every six months after that. In late January, its rate was close to the national average with the benefit of zero basis points at closing. 

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What’s a basis point? It’s a hundredth of the loan amount. The more points paid, the lower the rate, which is a second way to lower your monthly payment: through a buydown.

As Florida’s housing market cools off, sellers are becoming more willing to negotiate. Some will pay for repairs. Often, they will contribute cash to buy down the mortgage rate.

Here’s how a buydown helps you: Each point reduces the mortgage rate by one-quarter of a percentage point. If your lender is quoting a 30-year fixed rate of 6%, one point reduces that to 5.75%. Two points cuts the figure to 5.50%.

Every home sale is a negotiation, so it’s a good idea to ask the seller to contribute points to the deal. If the other side contributes 2 points and you pay 1 extra point, your loan rate would drop to 5.25% from 6%.

The extra points would decrease the monthly payment on a Miami-Dade home by $235 to $2,733 and a Broward home by $230 to $2,684.

That may not seem like much, but in a year’s time you will save about $2,800 that can offset much of your homeowner’s insurance or property taxes.

Not every lender will allow the seller to contribute points to your mortgage. Tropical Financial will. Learn more by talking to a TFCU mortgage loan officer.

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