You've probably heard the saying "marry the house, date the rate." It sounds smart. But what happens if the rate doesn't come back down anytime soon? This post answers that question: how do you avoid overextending yourself on a home purchase when you're banking on a future refinance that might not show up on time?

I spent a long time trying to write a post about how owning a home is financially superior to renting. I haven't been able to articulate it exactly the way I want. The gist of it is this: short-term plans favor renting, and long-term plans favor owning.

But homeowners will always lose if they overextend themselves on the purchase. If they buy knowing they can't afford the mortgage long term, but buy anyway expecting to swap their rate in for a lower one, they could lose in a big way.

Here are some loans and mindsets that might try to convince you to overextend yourself.

The 2-1 Buydown Pitch

The pitch goes like this: "For the first year your payment is 2% lower, second year is 1% lower, and you'll have refinanced before year two is up anyway."

First, your interest isn't 2% lower. The payment feels like it's 2% lower, but it doesn't lower your rate. The money for the temporary buydown only supplements your payment. That's a big difference, and it matters a lot if rates don't drop the way you're hoping.

The ARM Pitch

Same line of thinking here, but it gives you more time. "Fixed for 5 years, then your payment adjusts, but you'll refinance before then anyway."

The big difference is that if rates go up, your payment goes up too. It adjusts every 6 months or every 1 year depending on the loan. And the ceiling on how high it can go is much higher than a 2-1 buydown's ceiling.

"Marry the House, Date the Rate"

I believe you should be open to refinancing. Rates are cyclical. They move with inflation. You just need to plan on being patient while dating.

Be open to a long-term relationship, but be open to a 5% rate while you're still with a 6%. Don't take this as relationship advice.

How to Protect Yourself

Before you sign up for any loan that leans on a future refinance, make sure you can actually afford the payment as is, not the discounted version. If the real payment doesn't work for your budget, the loan doesn't work for you. You can run your own numbers with our affordability calculator to see what you can really handle long term.

If you want a second set of eyes on your situation before you commit to anything, grab a free planning session with me. I'd rather help you avoid a bad fit now than watch you struggle with payments later.

-Sam

Marry the House, Date the Rate? You Might Marry Both
Pin this for later

Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.