() — Make no mistake: this is a lousy time to buy a house.
Mortgage rates for a 30-year fixed-rate loan they are around 7%, more than 4 percentage points above what they were a year ago. That has reduced the purchasing power of a typical homebuyer by 14%, according to Black Knight, a mortgage data company.
This means that, currently, there are fewer people capable or interested in buying, so home sales have experienced a drop. Only 16% of people think this is a good time to buy a home, which is an all-time low, according to a monthly survey conducted by Fannie Mae in October.
Still, that has barely made a dent in home prices, which soared to new highs during the pandemic and are only now dipping from those all-time highs.
Another thing holding back sales is the stubbornly low inventory of homes available for sale, said Jackie Lafferty, a real estate agent with Baird & Warner Real Estate in Chicago.
“It’s a combination I’ve never seen before, lack of supply and very high interest rates,” Lafferty said. “There are no motivations for people to move, unless they have to.”
Whether people need to move for a new job, a divorce, a new addition to the family, or simply don’t want to give up after years of trying to buy a home, there are still buyers out there. .
“Even if sales go down, real estate deals don’t stop,” Lafferty said. “People need a place to live.”
For those who insist, here are some tips to make buying a home a little easier.
Apply for a loan now and refinance later
Buyers applying for a mortgage now do so in the hope that in a couple of years the rates will drop significantly and they will be able to refinance at a lower rate.
“Yes, rates have gone up much higher and faster than anyone expected,” said Melissa Cohn, regional vice president for William Raveis Mortgage. “But if someone can afford to buy today and wants and needs to, they shouldn’t let the high rate environment stop them, especially since sometime in the next year, or two years at the latest, rates are likely to be significantly lower.”
The disadvantage: high rates will have to be put up with for the time being. There is some risk that interest rates will not go down, or at least not by much. And if mortgage rates don’t come down, you could be stuck for a while, said Delyse Berry, CEO and principal broker at Upstate Down in Rhinebeck, New York.
“There could be a decrease in rates in the middle of 2023,” he said. “If that happens, you can do a refinance and get a lower interest rate and lower payments. But those fees are now the new cost of doing business.”
Also, refinancing can be extremely expensive. Closing costs are typically between 2% and 5% of the initial loan amount.
Likewise, unexpected events such as losing your job or your home depreciating in value can prevent you from refinancing.
Get an adjustable rate loan
Increasingly, homebuyers are exploring options outside of the standard 30-year fixed-rate mortgage. For example, adjustable-rate mortgages, or ARMs, now account for 12% of mortgage applications, up from 3% a year ago, according to the Mortgage Bankers Association.
The average rate for a 30-year fixed-rate loan was 7.08% last week, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage was a percentage point lower at 6.06%, according to Freddie Mac. Although they are also 30-year loans, ARMs offer a fixed rate for a set period of time, typically 5, 7, or 10 years, after which the interest rate returns to market levels.
“Buying today is about figuring out what to do to avoid high rates and feel comfortable with your purchase,” Cohn said. “When rates come down, it will be time to see what is the most permanent solution.”
For buyers who will be moving house in 5-7 years anyway, an ARM can be a way to increase purchasing power.
“For the first 5 to 7 years of an adjustable-rate mortgage, it walks, talks and acts like a fixed-rate mortgage,” Cohn said. “You have a lower rate and a lower payment because the bank only guarantees it for a shorter period of time.”
If rates go down, an ARM might even reset to a better rate.
The disadvantage: Borrowers must also accept the risk that rates will be even higher when the loan is reinstated, or at any time during the life of the loan. After the fixed period, ARMs can be reset every year or every six months.
However, most have limits on how much a rate can go up or down during each reset period and for the life of the loan, so it’s important to understand how each one works.
Reduce your interest rate with points
Borrowers can lower their repayments by paying in advance. This will lower the interest rate on the loan, either permanently or temporarily.
While a permanent reduction changes your rate over the life of a loan, a temporary reduction provides lower rates for a period of time.
In a buyout, borrowers typically get a two percentage point discount on the loan rate for the first year, a one percentage point discount in the second year, and by the third year, the loan returns to its original rate for the remainder of the loan. of your term. By then, many borrowers are hoping for lower interest rates, leaving the possibility of refinancing open.
“It’s a significant difference for the first year of the loan, as it brings the rate down from 7% to 5%,” Cohn said.
The disadvantage: While getting a lower interest rate is very attractive, it means shelling out more money up front. That might not make financial sense if you don’t plan on staying in the house for long.
“It takes about five years to break even by paying one point,” Cohn said. “Knowing that rates are likely to be significantly lower by then, it’s best to take the money you’d use to pay the points to pay for the refinance later.”
Apply for a seller’s credit to reduce your rate
In some real estate markets, competition between buyers has softened and sellers are forced to be more flexible in their offers.
One way a buyer can reduce their payments is to apply for a seller’s credit, or seller’s concession, as part of the deal. Buyers can use that money to lower their mortgage interest rate and lower their monthly payments.
“Sellers are now more willing to negotiate than in the past,” said Trudy Kelly, a senior home loan specialist at Churchill Mortgage in Oregon.
In September, when mortgage rates hovered around 5.75%, Kelly worked with borrowers buying a $590,000 home. Rather than offer $15,000 or $20,000 below the asking price to reduce the cost of monthly payments, the buyers asked for a $15,000 concession from the seller.
If the buyers had made a lower offer and gotten the house for $575,000, their monthly savings would be $78, Kelly said. But by lowering the interest rate by one percentage point, her payments dropped by $340 a month.
“That’s a big difference,” he said. “Ultimately what that did for them was expand their budget. It lowered their debt-to-income ratio giving them more purchasing power. He puts them in a time machine and takes them back to April or May. [cuando las tasas eran más bajas]”.
The disadvantage: in many areas, it is still a seller’s market. Applying for credit or a concession may be less attractive to a seller if you have other offers.
Buy with cash or increase your down payment
If you have the money to buy a house, now is a good time to do so. Not only will you avoid paying a high rate on a mortgage, but you’ll probably be able to negotiate a better price.
But not many people can pay cash: 97% of homebuyers in the last year needed financing for their home, according to a recent report from the National Association of Realtors.
Even if you don’t have enough to close a cash deal, putting more down will lower your mortgage amount, lower your monthly payments, and mean paying less interest over the life of the loan. If you own your current home, you can tap into some of the cash from the sale or possibly even tap into the equity to increase your down payment.
By making a larger down payment, you’ll not only lower your loan balance, but you’ll also increase the equity in your home, money you can get back when you sell, assuming the property appreciates.
The disadvantage: Using cash to purchase a property is always a tradeoff, as you’ll have to forgo other potential investments. And for most buyers, spending more money is not an option. The typical down payment for first-time buyers is 6%, while for repeat buyers it’s 17%, according to the National Association of Realtors.
