Happy young couple walking through empty home with realtor
Happy young couple walking through empty home with realtor

High interest rates shouldn’t keep you from home ownership

These 2 mortgage options can help you better budget interest expenses

Before you set aside your house-hunting dreams because of rising interest rates, consider this silver lining: Sometimes when rates go up, home prices go down.

January 2023 marked the 12th consecutive month that home sales have declined, and as a result, home prices are dipping.1 In February 2023, for example, nearly 28% of Ohio homes sold below list price.2

This would make it a buyer’s market – if it weren’t for the expense of higher mortgage rates, right? Well, there are a couple of silver threads running through the traditional “fixed” structure of home loans.

Let’s take a tour.

Shelter yourself from high interest with these 2 workarounds

The median monthly mortgage payment in Ohio is $1,269. In Kentucky, it’s $1,158, and in Indiana, $1,130.3

If you’re estimating a mortgage payment that’s higher than these figures, and it will strain your budget, you might want to consider one of these alternatives to the traditional, fixed-rate mortgage.

Adjustable-rate mortgages (ARMs)

An ARM is a home loan with an interest rate that can change periodically, based on the market. This can sound spooky, but when interest rates are high, this structure gives the borrower an edge. Here’s why: With an ARM, you lock into a lower introductory interest rate for several years – three, five, seven, 10, or 15. During that term, the monthly payment remains the same.

After that period, the rates will adjust to the national interest rate at predetermined intervals (such as once a year). If interest rates go down, your mortgage payment might as well. You also benefit from an ARM if you plan to pay off the house in a short period of time, or expect to refinance.4

Lock in now and refinance later

When you refinance a house, you replace the existing mortgage with a new loan, typically at a lower interest rate. But did you know you might be able to refinance your home in as few as six months after taking on a mortgage? If interest rates drop, you don’t necessarily have to wait years to refinance.

First Financial Bank offers a specialized mortgage that allows you to buy a home now and save on the interest rate later, by refinancing the loan. This option, eligible on certain fixed-rate mortgages originated and closed in 2023, allows for one free interest rate modification and/or closing cost discount within the first three years of the loan.

4 tips for knowing if it's the right time to buy

If an ARM or refinance package makes sense to you, the next step is ensuring you’re mortgage-ready. These four guidelines can help.

1. You have a good handle on debt.

Your debt-to-income ratio (DTI) is the amount of your pre-tax income used to pay off debt. Typically, the DTI ratio for an ARM caps at 50% (45% for a traditional mortgage), but aim for less. You can figure out your DTI by adding up all debts, dividing the total by your pre-tax income, and converting the result into a percentage.5, 6 Interest tip: You might be able to lower your DTI by consolidating your debts into a lower-interest loan.

2. You've paid, so you've scored.

The higher your credit score, the lower your interest rate is likely to be. This is especially useful when paired with the lower introductory rate that an ARM offers.7 Interest tip: You can find ways to improve your credit score here.

3. You've got enough for a down payment.

The minimum down payment required for a conventional mortgage is just 3%, and for an ARM, it’s 5%. Most homebuyers put down more – 6% for first-timers, and 13% for repeat buyers. Ideally, you’d like to put down more as well, because the greater the deposit, the lower the interest calculated against the debt. Interest tip: Traditional lending requires a 20% down payment to avoid private mortgage insurance (PMI) but check with your First Financial mortgage loan officer on programs that don’t require PMI with less than 20% down.8, 9

4. Your rent is going up (again).

Rent prices in the Ohio, Indiana, and Kentucky regions averaged nearly $820 in late March 2023. However, in metro areas the price scales up considerably – in Cincinnati, for example, the average rent for a two-bedroom was $1,750 – higher than the average mortgage.10, 11 So ask yourself: How long do I plan to stay in the house? Because closing costs and upfront expenses can cost thousands of dollars. Interest tip: When comparing mortgage to rent, tally the total costs, including insurance and taxes.

Choose the loan that's in your best interest

Our most important tip for home buying is this: don’t do it under pressure. Be realistic about your plans and take time to ensure you can live with the long-term commitment. A loan can be built to suit you if you know your blueprint.

You can compare all of our mortgage products, monitor interest rates, and calculate your payment on the mortgage section of our website. If you think you're ready to take the next step, you can also connect with a loan officer.

If an ARM or refinance package makes sense to you, the next step is ensuring you’re mortgage-ready.

1 “Is the housing market about to crash? Here’s what experts say,” By Jeff Ostrowski, Bankrate, March 13, 2023; https://www.bankrate.com/real-estate/is-the-housing-market-about-to-crash/

2 “Ohio Housing Market,” Redfin, (“In February 2023, 27.7% of homes in Ohio sold below list price, down 12.6 points year over year.”); https://www.redfin.com/state/Ohio/housing-market

3 “What Is The Average Mortgage Payment?” By Katie Ziraldo, Rocket Mortgage, Feb. 27, 2023; https://www.rocketmortgage.com/learn/average-mortgage-payment

4 “Adjustable-rate mortgages: Learn the basics of ARMs,” By Jeff Ostrowski, Bankrate, Dec. 21, 2022; https://www.bankrate.com/mortgages/basics-of-adjustable-rate-mortgages/

5, 6 “ARM loan requirements 2023,” Yahoo!, citing Bankrate, Jan. 27, 2023; https://www.yahoo.com/now/arm-loan-requirements-2023-145223600.html

“What is the best debt-to-ratio figure for a mortgage?” By Libby Wells, Bankrate, Oct. 10, 2022; https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/#calculate

7 “Loan Savings Calculator,” MyFICO; https://www.myfico.com/credit-education/calculators/loan-savings-calculator/

8, 9 “What Is The Average Down Payment On a House?” By Victoria Araj, Rocket Mortgage, Jan. 11, 2023; https://www.rocketmortgage.com/learn/what-is-the-average-down-payment-on-a-house

“ARM loan requirements 2023,” Yahoo!, citing Bankrate, Jan. 27, 2023; https://www.yahoo.com/now/arm-loan-requirements-2023-145223600.html

10, 11 “Median Rent (ACS)” (Averages $825/OH, $783/KY and $844/IN), World Population Review, 2023; https://worldpopulationreview.com/state-rankings/average-rent-by-state

“Rental market trends in Cincinnati, OH” Rent.com, March 21, 2023; https://www.rent.com/ohio/cincinnati-apartments/rent-trends

The information on this page is accurate as of April 2023 and is subject to change. First Financial Bank is not affiliated with any third-parties or third-party websites mentioned above. Any reference to any person, organization, activity, product, and/or service does not constitute or imply an endorsement. By clicking on a third-party link, you acknowledge you are leaving bankatfirst.com. First Financial Bank is not responsible for the content or security of any linked web page. Member FDIC / Equal Housing Lender.

See a mortgage loan originator for details. All loans are subject to credit review and approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. NMLS #619717.

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