How To Buy A House When Interest Rates Are High
Written by Falynn Auston
Are the current interest rates keeping you sidelined from buying your next home?
You’re not alone; the majority of my buyers are on the fence, often saying, “We’re waiting for rates to come down.”
But what if I told you that we can strategically structure your offer to make your monthly payment more affordable while buying a house in a less competitive market?
Nearly all of my recently financed clients have received concessions from sellers in one form or another, even in a multiple-offer situation. Just a few months ago, it was a seller’s market and the seller concessions were few and far between. However, with many buyers waiting on the sidelines, sellers now realize they must either offer a lower price or a credit to the buyers to help them buy down the rate.
Read on to learn about your options as a buyer and the questions you should be asking your realtor and lender.
The most popular option, though not always the one that yields the largest savings, is negotiating a lower sales price.
While this may seem like the best deal, there’s an alternative approach that can yield even greater monthly savings. For example, if a home is listed at $725,000 and you negotiate a $25,000 discount, closing the deal at $700,000 with a 20% down payment equals a loan amount of $560,000. At an 8% rate you will have a Principal and Interest Payment of $4,109.08.
Another more cost-effective option is offering the full asking price of $725,000 and asking the seller to cover $25,000 towards an interest rate buydown.
The full price of $725,000 with 20% down is a loan amount of $580,000, and with an estimate based on today’s drop rate of 7%, the resulting monthly payment is $3,858.75. This is a savings of $250.33 per month or $3,003.96 per year.
Now, let’s explore the seller credit option.
Let’s say the numbers work for you. You’re good with the monthly payment, but suppose the home you’re interested in needs renovations and after the down payment and closing costs you won’t be left with any money to fund the renovations. In this scenario your best option would be to have the seller apply that $25,000 credit to cover your closing costs, leaving you with more cash in hand after closing to create your dream kitchen or bathroom.
Finally, let’s dive into the option of a temporary rate buydown.
These are available in 1-, 2-, and 3-year versions, often advertised as a 3-2-1, 2-1, or 1-1 buydown. Imagine you’re approved for an 8% interest rate. In a 3-2-1 program, you receive a 3% rate reduction in the first year of your loan (resulting in a payment at 5% interest), a 2% rate reduction in the second year (payment at 6%), and a 1% reduction in the third year (payment at 7%). Afterward, you return to the full 8% interest rate for the remainder of your loan or until you refinance. Similar programs, like 2-1 and 1-1 buydowns, provide 2% and 1% discounts, respectively. The idea is to benefit from a reduced monthly payment for 1, 2, or 3 years, and hopefully refinance into a lower permanent interest rate as rates drop. It’s important to note that the seller has to cover the cost of the temporary buydown, which amounts to the savings achieved.
However, there’s a crucial detail to keep in mind about the temporary buydown: you can’t refinance until you have 20% equity in the home. So, if you’re not already bringing around a 20% down payment, don’t rely on the hope that there will be enough equity gain in the next couple of years to refinance out of it. You have to be comfortable with the full interest rate, as we don’t have a crystal ball to predict when rates will drop.
In closing, there are various creative ways to make your monthly payment more affordable.
Collaborating with a hyper-local agent and a local lender is key to securing the lowest, most affordable monthly payment. We work closely with all our lenders, and in this market, we’ve seen all of our financed buyers benefit from these strategies.
Here is what one of our local lenders, Megan Higgs from Bryte Home Loans, had to say about the current market and how she is helping her clients purchase homes.
“A real estate environment with higher interest rates can make it difficult to buy a home. Through various affordable lending strategies, we look at real numbers and data, shifting away from an often emotional affordability perspective toward attainable affordability solutions. Working closely with each buyer’s individual situation, these strategies can put them in an ownership position, building equity during a less crowded purchase market.”
If you are interested in learning more about how you can purchase a home in Gig Harbor with these creative strategies, give me a call at (360) 421-6585. I am a top real estate agent in Gig Harbor and can’t wait to help you!
Falynn Auston has a can’t stop-won’t stop attitude when it comes to helping you buy or sell your Gig Harbor home. Whether you’re looking for your first home, investment property, or downsizing, she’s there for you every step of the way and is here to arm you with all the information you need to make the best investment decision.
A true neighborhood expert, Falynn will tell you everything you want or need to know about Gig Harbor, from the best breakfast spots to where you can find the best views of the sunset. She knows all the local people and all the local happenings. Her husband, a captain at the South Kitsap Fire Department, and her family are deeply integrated into both communities.