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Buying a Home in a High Interest Rate Market

Growth in real estate price market

It’s the end search is over. Stop even looking for a house. You’ll never be able to afford it, not with those interest rates. Is that what you’ve been hearing or thinking? Is it even worth looking at homes anymore? Is your dream crushed? The reality is that, no, you aren’t out of the running. It’s just a different market now.

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Today I’ve got Sarah back on the podcast, and one of the reasons I really wanted her back here is because she’s been doing this for 20 years, and guess what? She’s seen interest rates hit double digits before. So she’s gonna help us talk about what kinds of things we can do to buy a home in a high interest rate market.

Sarah’s Contact Info:
Sarah Krasner: (702) 466-6430
NMLS #1272407

We’re in first half of 2023 right now, after about 2 years of unprecedented low interest rates and soaring home prices. Those prices have pushed many people out of their budgets and they’ve stopped the home search. Does this sound like you? Listen on – we’ve got some great tactics and options to help you still find a home.

So, let’s talk about what options you have to still buy a home during a higher interest rate season.

What are the rates looking like right now?

We’re seeing ranges from 5, 6, to 7% as of this recording, and we don’t know where the rates are going to go. They continue to rise, but we’re not economists, and don’t have a crystal ball to see into the future.

Interest rates are always fluctuating, and rise and fall. You’ve probably heard that you date the rate, marry the home. And in this case, you look at the price you paid for the home as the one thing that’s going to stay stable, not the interest rate. Your principle, that is, what you owe on the home, only goes down with each payment. 

let’s talk about how is this affecting buyers?

it’s affecting both my buyers and sellers. The buyers are having a tougher time finding homes simply because their pre-approval was likely for a lower interest rate, and they are finding that the approvals are being updated to a lower amount. They just don’t have the buying power and so there are fewer homes to look at in their price range.

From a seller’s perspective, there’s less buyers out there since many have stopped shopping in hopes prices or interest rates drop. We have seen some price drops, but no buyer wants to sell their home for less than they listed it.

We’re also seeing that with interest rates changing so quickly, sellers are much more concerned about how qualified the buyers are, as the number of buyers that aren’t able to complete the loan process has increased significantly.

Your Options:

Let’s go ahead and look at some options you have as a buyer to still purchase a home while interest rates are higher, and then we’ll go into more detail about them:

1 – Buy down your rate, you may be surprised how much lower you can actually get.

2 – Work with a lender who will refinance you in the next year or two at no cost.

3 – Try different options from a financing standpoint. One of those can be a 2-1 buydown, an ARM loan, or other programs your lender might be offering.

4 – Start by looking at homes that have been on the market for over 30 days. If they haven’t had any price reductions, you may be able to offer below ask and still get your offer accepted.

5 – Similar to the homes on the market over 30 days, but have your real estate agent look at homes that are offering seller concessions. These can be used to help pay for closing costs including rate buy downs.

Let’s look at each of these in more detail, to give you an idea of how this can impact the purchase of a home.

1 – Buy down your rate, you may be surprised how much lower you can actually get.

Let’s start by talking about buying down your rate.

Buying down your rate means that you are asking the bank to give you a lower interest rate on your loan. You do this by paying some of the money for the home up-front, in what are called points. 

When you buy down your rate, you’re agreeing to pay more money now in order to have a lower monthly payment for the life of the loan. It’s important to think about how long you plan on living in the home, and how much money you would save overall, before deciding whether or not buying down your rate is right for you.

What is typical of buying down your rate?

Generally speaking, for every one point that you buy down, your interest rate is lowered by .25%. For example, if your interest rate is 4.5%, and you buy down one point, your new interest rate will be 4.25%. 

The number of points required to buy down your rate varies depending on the lender, but it’s common to see two or three points required to lower your interest rate by .5%.

While buying down your rate can save you money in the long run, it also means that you have to come up with more cash up front. 

2 – Work with a lender who will refinance you in the next year or two at no cost.

If you are willing to wait, and are planning on staying in your home for more than a few years, it might make sense to work with a lender who will refinance you in the next year or two at no cost. 

Refinancing is the process of  taking out a new loan with a lower interest rate to replace your current mortgage. You might do this if interest rates have dropped since you first got your mortgage, to overall lower your payments.

If the value of your home has gone up, you may also be able to refinance and get cash out of your home’s equity. This can be helpful if you have a large project, like home renovations, or if you want to consolidate debt.

The value of your home is based on many things, but the most important factor is what other comparable homes in your neighborhood are selling for. So, if you live in a rapidly appreciating area, your home is likely to be worth more than it was when you bought it. This value above what you owe on the home is equity, and that gives you leverage to refinance for a higher loan amount.

Refinancing could save you money every month, and over the life of the loan as you’ll be paying less interest overall. 

Nobody knows what interest rates will do, and as long as you are comfortable at your current rate, you can wait until interest rates have dropped to the point where it makes sense to refinance. Many lenders will refinance you at no cost if you used them for the original loan. Make sure to talk to them about that and keep in touch with your loan officer. They’ll have a beat on the rates and can give you a good idea when to refinance.

When you refinance, you are getting the current market rate. Ideally, this also gives you time to work on your credit, to ensure that you get the best possible rate. Remember, one of the best ways to increase your credit score is with a mortgage.

3 – Try different options from a financing standpoint. One of those can be a 2-1 buydown, an ARM loan, or other programs your lender might be offering.

With a 2-1 buydown, you pay two points up-front to lower your interest rate by 2% the first year, and 1% the second year. If your interest rate is 6.5%, it would be lowered to 4.5% the first year. The second year, it would adjust to 5.5%. After that, it would continue at the 6.5% rate. This gives you a first year of relatively lower payments, the next year still fairly low, and then a fixed rate for the remainder of the loan. If the interest rates do not improve in the first two years, you still saved money and the increases weren’t a surprise. If interest rates did drop, you have the option to refinance without any repercussions or penalties.

An ARM, or adjustable rate mortgage, is another option some people choose instead of buying down their rate. With an ARM, your interest rate is lower for a fixed period of time, usually 5 years. After that, it will adjust on a set timeframe based on the current market rates. Many people choose this option because they feel comfortable with the monthly payments for the first five years, and after that, they will either have the option to refinance or to sell their home before the higher rate kicks in. If you don’t plan on staying in the same home for more than five years, this could be a good option for you.

Talk to your lender about all of the different options available to you and see what makes the most sense for your situation. There is no one-size-fits-all answer when it comes to financing a home, so make sure to explore all of your options. Some lenders may have programs that we haven’t covered. Make sure to shop around and ask about what they can do for you.

Let’s look at the 4th option which you would work with your real estate agent on:

4 – Start by looking at homes that have been on the market over 30 days. If they haven’t had any price reductions, you may be able to offer below ask and still get your offer accepted.

So your buying power has likely decreased because your original pre-approval was for a lower interest rate, or you are just starting out and your budget isn’t quite what it could have been with lower interest rates. You can start to look at homes that have been on the market for an extended period of time. Anything over 30-45 days is a great starting point, especially if there haven’t been any price reductions. Don’t worry about “offending” the seller, it’s about making a competitive offer on the home that’s still within your budget and approval.

In Southern California, in April of 2022, homes were selling for 104.6% above asking price. In August of 2022, that’s now at 98.9%. This means on average homes are actually selling for less than they are listed for. Go ahead, put an offer under the list price, you might just be surprised at what a seller will accept.

The last option we’re going to talk about is seller concessions.

5 – Similar to the homes on the market over 30 days, but have your real estate agent look at homes that are offering seller concessions. These can be used to help pay for closing costs including rate buydowns.

Instead of lowering the price of the home, many sellers are opting to entice buyers by helping to pay for some of their closing costs. This could include rate buy-downs, which we talked about earlier. This is a great option if you’re still not sure about the interest rates and want to lock in a lower rate for at least the first few years of your loan. It’s also a great way to save some money on your closing costs, which can be quite expensive.

Let’s break this down a little.

Imagine you are looking at a home at the top of your price range. Interest rates have gone up and that home is now out of reach for you without additional funds coming from you. 

If the seller is willing to help pay some of your closing costs, this can be applied towards a rate buy down. This could put you back at the interest rate that you need to be at in order to qualify for a home at that price.

In summary, there are ways you can get lower rates, find homes that cost less, or have the sellers help. Work with your real estate agent and lender to find what option works best for you.

Thank you for your support, and happy home buying!