A Home Buyer’s Secret Weapon In a High Interest Rate Market
Grab your pen and paper, friend - we’re about to nerd out so you can confidently take action in this high interest rate market 🤓
When you reach that point in life where you’re ready to buy a home or make a move, you might become VERY overwhelmed when you start to see all that’s involved.
There’s the home search, loan approval, making offers, home inspections and then finally closing.
Not to mention all of the prep that’s required before all of that. And then you throw in the wild west 🤠 market like we’re seeing today and you start to hear things like “high interest rates,” “sellers market” or “ low supply.”
All of which might make you a bit fearful and can even cause you to take no action at all. While I understand why it feels easier to sit back and stay where you are, by doing so you’re putting your life and dreams on hold and that’s something that I personally can’t let happen!
So, call me your new real estate bestie and let’s figure this thing out together 🥳
First things first, what even are interest rates?
Put simply, interest is the price you pay to borrow money. Anytime you want to take out a loan, whether that be for college, a home, a car, etc. OR any time you swipe your credit card, you are being charged interest for the money you are borrowing.
When interest rates are high, it’s more expensive to borrow money. When they’re low, it’s less expensive to borrow.
When it comes to buying a home, interest rates play a huge factor in your overall mortgage payment and what we call “buying power”.
Your mortgage consists of 4 main components:
Principal - the loan amount you initially borrow from a lender to buy your home
Interest - the percentage of the principal you pay over the life of your loan to your mortgage company as a fee for lending you the money
Taxes - no matter where you live, you’ll pay a property tax and the amount you pay is based on a percentage of your property value which can fluctuate year to year
Insurance - homeowners insurance and mortgage insurance are two of the most common types that will factor into your mortgage payment
The reason that interest rates play such a huge role in your mortgage is due to the fact that if you have a loan amount of $350,000 and the interest rate is 7% (our current high market average), you’ll be looking at about a $2,328 per month payment.
Versus if the interest rate is 5%, your monthly payment will come in at about $1,878 – a $450 per month difference 🤯
As a buyer, I know this might not sound super fun for you, which is why I want to make sure you know that YOU HAVE OPTIONS and you aren’t forced to play the waiting game.
Before I get to those options, let’s quickly touch on what determines the change in interest rates:
A few things in the economic world influence interest rates with the 3 most important being:
Inflation
Federal Funds Rate (if you ever hear a realtor say “The Fed” this is what we’re referring to!)
Unemployment Rate
To understand how these work together, imagine that each of these factors are a dial.
When inflation and the unemployment rate get turned up, you’ll see the Federal Funds Rate rise 📈. When inflation and unemployment level out, you’ll see the Fed drop their rate 📉.
The interesting part about this is that mortgage lenders aren't reacting to the Federal Rate changes, they're anticipating them. Lenders know that the Federal Rate will always be fluctuating, so they get ahead of the game so that if rates go up (which is what we're seeing currently), it's not such a shock to the system.
We could talk about interest rates for days and I explain a little more in this blog post if you need more insight, but now that you know the jist, let’s address the question that SO MANY PEOPLE tend to be asking: should I wait until interest rates are lower to buy?
If you’re asking this question, please know that I hear you! It seems like the logical thing to do if you’re looking at it with no real insight.
The thing that I want you to remember is that: you MARRY the house 💍 and you DATE the rate 🤝
I’ll admit, these are the highest rates that we’ve seen since the late 90’s and early 2000’s, but the thing you want to remember is that you aren’t locked into this rate forever.
Getting in the door NOW might prove more opportunity for you than “waiting it out.” After all, when one door closes, a window opens 😜
But really, there’s a true cost to waiting which is why I’m so passionate about helping you mitigate current short term pains (like high interest rates) so you can experience long term gain.
Now that you know the overview on interest rates, mortgage payments and the cost of waiting, let’s dig into HOW you can confidently buy in a high rate market without feeling like you’re breaking the bank.
When interest rates rise, it affects how people are qualified for a mortgage loan and could prevent them from being approved for the amount they need to buy a home. This not only becomes problematic for the buyer, but also for the seller.
On the buyer's end, you become stuck with fewer options and may not be able to get the home you really want. On the seller's end, you face fewer bids on your home and could even have to reduce your price in order to attract qualified buyers.
As a buyer, you don’t want to compromise on one of the largest and most important investments of your life. And as a seller, you don’t want to settle for less than what your investments are worth.
So, is there a solution that helps both parties walk away happy and satisfied?
Glad you asked 😏
There’s a lesser known mortgage lending technique that’s rarely used unless we’re in a high rate market like we’re finding ourselves in today.
It’s what I like to call a secret weapon that creates a win/win situation for all involved, and because I’m all about helping people win in real estate, I’m making it a not-so-secret so you know your options and can confidently take action when you’re ready 🎉
*cue Jay Z and allow me to reintroduce The Seller-Paid Rate Buydown*
This technique essentially allows borrowers (aka buyers) to make a lower mortgage payment for the first 2 years of their loan.
So, let’s say the interest rate for the home you want to purchase is currently averaging around 7%.
If you opt for the Seller-Paid Rate Buydown, that rate will be reduced by 2% making your rate 5% for the first year.
The following year, you’ll see a 1% decrease from the original rate, making it 6%. And finally, in that third year, your rate will rise back to the original amount.
Here’s what this might look like in action with a $400,000 loan amount and an interest rate sitting at 7.25% ⬇️
Information provided by Andria Eames with Cross Country Mortgage
The important thing to note here is that this rate buydown is funded by the SELLER, not you as a buyer, which means that you can purchase the home that you really want and buy yourself time for 2 years until you can refinance with a permanent fixed rate.
Because remember: you marry the home and date the rate!
And seller, I see you 👋🏼 You might be wondering how this benefits you, so hear me out:
If your home is sitting on the market and not selling, the first thing you’re likely going to do is reduce the price. When you agree to the Seller-Paid Rate Buydown, on the other hand, you’re increasing the chance of your home selling FASTER at list price - two of the things that are important to you during the selling process, right?!
When this is agreed on, as a seller, the buydown amount comes off your bottom dollar at closing. When you run the math for a buyer, offering a buydown will actually decrease their payment almost 10x than just taking that price reduction and reducing the loan amount.
We're all about working smarter over here. When you can reframe the idea of a price reduction with offering to buy down the buyer's interest rate, you create a positive solution for both parties. 🏆
I know this is A LOT of information, but my motto is that educated people make smart moves and knowing that you’re making a smart move in real estate is important to you isn’t it?!
If you think this concept might be the thing you need to finally take action, let’s start the conversation and see what it may look like for you!
