There is no sugarcoating it: This is a terrible time to buy a home.
Mortgage rates for a 30-year fixed rate loan are now hovering above 7%, more than 4 percentage points higher than a year ago. That has slashed a typical buyer’s purchasing power by 14%, according to Black Knight, a mortgage data company.
With fewer people able or interested in buying now, home sales have been falling. Just 16% of people say now is a good time to buy a home, a record low, according to a monthly survey conducted by Fannie Mae in October.
Still, that’s barely made a dent in home prices, which soared to new heights during the pandemic and are now just easing off of all-time highs.
Another thing tamping down sales is stubbornly low inventory of available homes for sale, said Jackie Lafferty, a real estate agent with Baird & Warner Real Estate in Chicago.
“It is something I’ve never seen a combination of, this lack of inventory and higher interest rates,” Lafferty said. “There is no motivation for people to move unless they have to.”
But whether people need to move because of a new job, a divorce, an addition to the family or they simply don’t want to give up after years of trying to buy a home, there are still buyers out there.
“Even if sales slow down, real estate doesn’t stop,” said Lafferty. “People need a place to live.”
For those who are pressing on, here are a few ways you can take some of the sting out of buying a home.
Take a loan now and refinance later
Buyers taking out a mortgage now are doing so with the hope that within a couple years, rates might meaningfully drop and they can refinance to a lower rate.
“Yes, rates have gone up much farther and faster than anyone expected them to,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “But if you can afford to buy today and want and need to, you shouldn’t let the higher rate environment stop you, knowing that at some point in the next year, two years at the most, rates are likely to be significantly lower.”
The downside: You’ll still have to stomach the higher rate for the time being. There is some risk that interest rates may not fall, or at least not by much. And if mortgage rates don’t go down, you could be stuck with it 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,” she said. “If that comes to pass, you can do a refinance and secure a lower interest rate and lower payments. But these rates could now be the new cost of doing business.”
Plus, refinancing can be extremely costly. Typically, closing costs run between 2% and 5% of the loan’s principal amount.
And unexpected events may prevent you from refinancing, like losing your job or losing value in your home.
Get an adjustable rate loan
More home buyers are exploring options outside of the standard 30-year fixed-rate mortgage. For example, adjustable rate mortgages, or ARMs, now make up 12% of mortgage applications, up from 3% a year ago, according to Mortgage Bankers Association.
While the average rate for a 30-year fixed-rate loan was 7.08% last week, the rate for the 5-year Treasury-indexed hybrid adjustable rate mortgage was a full percentage point lower at 6.06%, according to Freddie Mac. Though they are still 30-year loans, ARMs offer a fixed rate for a set period – typically 5, 7 or 10 years – after which the interest rate resets to current market rates.
“Buying today is about figuring out what can you do to bridge this high-rate environment to get yourself comfortable with your acquisition,” said Cohn. “When rates drop, it is time to see what your more permanent solution will be.”
For buyers who may be moving out of the home in 5 to 7 years anyway, an ARM may be a way to boost purchasing power.
“For the first 5 or 7 years of an adjustable rate mortgage, it walks, talks and acts just like a fixed-rate mortgage,” said Cohn. “It has a lower rate and lower payment because the bank is only guaranteeing it for a shorter period of time.”
If rates come down, an ARM could reset to a better rate.
The downside: Borrowers must also accept the risk that rates could be even higher when the loan resets, or any time over the life of the loan. After the fixed period, ARMs can reset every year or every six months.
However, most do have caps on how much a rate can go up or down during each reset period and over the life of the loan, so it’s important to understand how your loan works.
Buy down your interest rate with points
Borrowers can lower their payments by paying more upfront to buy down their mortgage rate. This will lower the loan’s interest rate, either permanently or temporarily.
While a permanent buydown changes your rate for the life of a loan, a temporary buydown provides lower rates for a period of time.
In a temporary buydown, typically borrowers get two percentage points off the loan’s rate for the first year, one percentage point off for the second year, and by the third year, the loan returns to its original rate for the remainder of its term. By then, many borrowers expect there to be lower interest rates, which leaves open the possibility of refinancing.
“That is a meaningful difference for the first year of the loan, lowering your rate from 7% to 5%,” said Cohn.
The downside: While getting a lower interest rate is very appealing, it means shelling out more money up front. That might not make financial sense if you don’t plan to stay in the house for a long time.
“It takes about five years to break even on paying down one point,” said Cohn. “Knowing that rates are likely to be meaningfully lower by then, you might be better off taking the money you’d use to pay for points to pay for refinancing later.”
Request a seller’s credit to buy down your rate
In some housing markets, competition among buyers has softened, and sellers are being forced to be more flexible on offers.
One way a buyer can reduce their payments is to ask for a seller’s credit, or a seller’s concession, as part of the deal. Buyers can then use that money to buy down the interest rate on their mortgage and reduce their monthly payments.
“Sellers are willing to negotiate more now than they have in the past,” said Trudy Kelly, a senior home loan specialist at Churchill Mortgage in Oregon.
In September, when mortgage rates were around 5.75%, Kelly worked with borrowers who were buying a $590,000 house. Rather than offering $15,000 or $20,000 below the asking price to reduce the cost of the monthly payments, the buyers asked for a $15,000 seller’s concession.
If the buyers had made the lower offer and got the home for $575,000, their monthly savings would be $78, said Kelly. But by paying down the interest rate by one percentage point, their payments dropped by $340 a month.
“That is a huge difference,” she said. “Ultimately, what that did for them was expand their budget. It lowered their debt-to-income ratio giving them more purchase power. It puts them in a time machine and takes them back to April or May [when rates were lower].”
The downside: In many areas, it’s still a seller’s market. Asking for a credit or concession might be less appealing to a seller if they have other offers.
Buy in cash or increase your down payment
If you’ve got the cash to buy a home, now is a good time to do it. Not only will you avoid paying a high rate on a mortgage, you’ll likely be able to negotiate for a better price.
But not many people can pay in cash: 97% of homebuyers over the past year needed to finance their home, according to a recent report from the National Association of Realtors.
Even if you don’t have enough for an all-cash deal, throwing more at the down payment will reduce the amount of your mortgage, lower your monthly payments, and mean paying less interest over the life of the loan. If you own your current home, you can leverage some of the cash from your sale or possibly even tap the equity to boost your down payment.
By making a larger down payment you will not only reduce your loan balance but also increase your home equity, money you can recoup when you sell – assuming the property appreciates.
The downside: Using cash toward a real estate purchase is always a trade-off, as you’ll have to forgo other potential investments. And for most buyers, coughing up more cash just isn’t an option. The typical down payment for first-time buyers was 6%, while it was 17% for repeat buyers. according to the National Association of Realtors.