13 - Buying a Home in a High Interest Rate 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.

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. 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 cover five options:
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.

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

Transcript

Phil: 0:00

Welcome to the First Time Home Buyers podcast. 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 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. So welcome back to the show..

Sarah: 0:50

Thank you so much, Phil. I think that we can give some great ideas from a lender's perspective.

Phil: 0:55

And I'm also a licensed real estate agent, so I'm gonna give some perspectives too that I've helped with some of my buyers and sellers on some of the things that we've been doing as well. So right now we're in the first half of 2023. After about. Two years of unprecedented low interest rates and unfortunately, soaring home prices, those prices have pushed a lot of people out of their budgets and they've stopped their home searches. Does this sound like you? Listen on, we've got some great tactics and options. I wanna still help you find a home that you can afford. So let's talk about what options you've got. During the high interest rate season, and Sarah, maybe just give us an idea, what are the interest rates looking like right now?

Sarah: 1:40

We're seeing ranges anywhere from the fives to 7%, and we don't know where the rates are going to go. They could continue to rise., they are trending down, but we're not a economist and we don't have a crystal ball to see into the future. Interest rates always fluctuating. They rise and fall. You've probably heard . I hate this saying the date the rate, marry the home, and in this case, you can look at the price that you paid for the home as the one thing that's going to stay stable, not the interest rate.

Phil: 2:21

So let's talk about how this is affecting buyers out there. And my buyers and sellers are definitely having a tougher time finding homes simply because their pre-approval was for a lower interest rate, so the dollar amount was higher. And as these interest rates have gone up, , they've had to adjust those down and they're updated to that lower amount, so they just don't have the buying power. So there's fewer homes in their price range from a seller's perspective. There's less buyers out there since many have actually stopped shopping, hoping that interest rates are gonna drop, or these home prices are gonna drop. We're also seeing that with interest rates changing so quickly, Sellers are much more concerned about how qualified the buyers are. Is that pre-approval from two months ago when the interest rate was a lot lower. We've also seen that the number of buyers that aren't able to complete the loan process has actually increased because of this. Let's go ahead and look at some of the options you have as a buyer to still purchase a home while if interest rates are higher. And then let's go into more details. So I've got these five points I wanted to go over. first one is buying down your rate. You could be surprised how much lower you can actually get. Second one is working with a lender who will refinance you in the next year or two at no cost. The third is trying different options from a financing standpoint. One of those can be a two, one, buy down an arm loan or other programs that your lender might be offering. The fourth one is 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. And the last one here is similar to the homes on the market over 30 days. But really make sure you 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 by downs. And we'll get into what rate by Downs are here next. So Sarah, maybe you could help explain what this is buying down your rate and how you can actually get that to a better interest rate.

Sarah: 4:30

Sure. Buying down your rate means that you're asking the bank to give you a lower interest rate on your loan. You can do this by paying some of the money for the home upfront 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 So 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 to buy down the rate. And if it's for you.

Phil: 5:06

I think that's a really great point. It is important To look at this on the long term approach. What is typical of buying down your rate?

Sarah: 5:15

Generally speaking, let's say you're trying to get your interest rate down to 5% and you were quoted five and a half percent, you might need up to two points to get the rate to go. lower So interest, your new interest rate would be 5% instead of the 5.5%. This is going to fluctuate between lenders, between banks, and between programs. All of this is very generalized.

Phil: 5:46

This is where you want to sit down with your loan officer and go through a lot of different scenarios and say, well, I have X amount of dollars that I'm willing to put towards buying down my rate. If you're buying a home and you're spending something like $400,000 and you're putting three and a half percent down, you're paying$14,000 in your down payment. If you have extra money that you want to put towards the house to buy those points down, maybe five to $10,000 more might get you from a six and a half percent interest rate down to 6%. That difference is gonna be over a hundred dollars a month in savings, but you also have that interest rate for the long run. And so that's one way for you to get a lower interest rate is by actually paying to lower that interest rate as opposed to a higher down payment. Oftentimes, you'll see that that lower interest rate is more beneficial, so definitely work with your loan officer to see what scenarios work best for you in your situation. Now the next one is working with a lender who's gonna refinance you in the next year or two when hopefully interest rates have dropped at no cost. If you're willing to wait, you're already qualified at that rate and you're planning on staying in your home for more than a few years, it might make sense And Sarah, are you able to do this often?

Sarah: 7:07

If it makes sense to refinance, we offer that to all of our past clients. but let's get into what refinancing is. Refinancing is the process of taking out a new loan with lower interest rate to replace your current mortgage. You might do this if interest rates have dropped since you first got your mortgage to lower your overall payments. or 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 or a combination.

Phil: 7:45

One of the things to consider is in these higher interest rates and higher cost homes, you may be able to find a home that maybe needs a little bit of cosmetic work. Maybe it's got an older kitchen or bathroom Through and a lot of people have been passing it up. This may be that opportunity to get that home, knowing that in the next year or two you might be able to do a cash out refinance and use that towards some renovations. There's even options to do renovation type loans, but that's a whole nother topic that we can get into.

Sarah: 8:14

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 are going to do in the future, and as long as you're comfortable at your current rate, you can wait until interest rates have dropped to the point where it makes sense to refinance. As a lender, I will talk with you about doing no cost refinances. When the time makes sense, I'm going to have my ears peeled to the floor. And to, all of my rate sheets to see when the optimal time for you to refinance will be and I'll reach out at that time.

Phil: 8:53

one of the things to also remember is if maybe you had a little bit of a higher interest rate because your credit wasn't as great as it could be. One of the best ways to increase your credit score is making consistent payments on your mortgage over the long term. I want to talk about this trying different options from a financing standpoint. There's a few different programs I want to talk about two in particular. One is called a two one buy down. and the other is called an arm loan. There might be other programs that your lenders might offer, but to give you an idea, with a two, one buy down, you pay 2%, which is two points upfront of the loan to lower your interest rate by 2% in the first year and 1% the second year. So for example, if your interest rate is six and a half, In that first year, it's gonna be four and a half percent, the second year, five and a half percent. And then after that, from years three through 30, it's gonna be six and a half percent. This gives you a year of relatively low payments. The next year is still fairly low, and then it's that fixed rate for the remainder of the loan. If the interest rates do drop, what's great is you can refinance without really any penalties, typically. Is a caveat to this. Only sellers or the agents can pay for this, and so it's something that you do need to make sure that you work with your real estate agent to put into the offer.. Now the next one is an arm or adjustable rate mortgage. Sarah, can you talk a little bit about this?

Sarah: 10:26

Sure. An arm Or an adjustable rate mortgage is another option for some people to choose instead of buying down their rate. And with an arm or adjustable rate mortgage, your interest rate is lower for a fixed period of time, usually five years. And then 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 then after that, they'll either have the option to refinance or sell their home before the higher rate kicks in. And if you don't have a plan on staying in the home for say more than five years, this could be a great option for you. definitely talk to your lender about all the different options available to you and see what makes sense and the most sense for your situation. There is no one size fits all answer when it comes to financing a home. Make sure to explore all of your options. make sure to ask your lender about all of the programs that they have available that would fit your criteria.

Phil: 11:32

We talked in another episode about non-standard loans, and sometimes that might be the best way to go. Look at the different kinds of programs that are out there and what you can take advantage of and what you qualify for. Now the fourth option is to look 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. This is usually when you're buying powers decreased because your original pre-approval was for a lower interest rate, or you're just starting out and your budget isn't quite what it could have been with lower interest rates. Really start looking at homes that have been on the market for an extended period of time., anything over 30 to 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. I was looking at numbers. Just comparing August versus, April, in Southern California in April of 2022, homes were selling for 104.6% above asking price. In August of 2022, it is at 98.9%. That means on average, homes are selling for less than they're listed for. Go ahead, put an offer under the list price. You might just be surprised at what a seller will accept and what's important is to work with a real estate agent, where you guys have talked about this and make sure you have a real estate agent that really understands this strategy.

Sarah: 13:05

in a lot of different markets, we are seeing under asking, contracts get accepted by buyers. So right now you definitely have more leverage than you would in previous months.

Phil: 13:18

and it's great to hear that from the lending side. Now, I wanted to talk about another angle that you can take with your real estate agent, similar to the homes on the market over 30 days and offering under Ask. You can also have your real estate agent look at homes that may be offering seller concessions or make sure that you're working with an agent who's going to go in and ask for seller concessions. And what are seller concessions? Seller concessions. Is any money that the seller is willing to give you as the buyer. As part of your closing costs or down payments. And this can be things like using for your rate buy down so that you could lower your interest rate. This could help offset closing costs or your down payment. This is a great option if you're still not sure about the interest rates, but you could leverage seller concessions, giving you a lower interest rate without you having to pay directly for it. It's a great way to save money on your closing costs as well. So let's kind of break this down. If you're looking at the home at the top of your price range, interest rates have gone up in that home is now out of reach. Because of that, if the seller's willing to pay what it would cost to get that interest rate where you were before.. It doesn't cost you anything different. You could have that better interest rate and you could afford this home. work with your real estate agent to come up with options where you can use seller concessions to get you back to that interest rate. That makes sense. To summarize, there are ways you can get lower rates, find homes under asking price or have the sellers help pay for that interest rate to go lower. Work with your real estate agent and your lender as a team. Find out what option's gonna work best for you. Sarah, I really want to thank you for coming on this episode. Can we give out your contact info so that people can reach out to you directly?

Sarah: 15:12

Absolutely., you can call or text me at (702) 466-6430.

Phil: 15:20

Perfect. And when you reach out, please let her know that you heard her on our podcast here at the first time. Home Buyers. Also head over to FTHBPros.com. We've got all of our other episodes available, articles, resources along with access to our Facebook group where we have lenders and agents, including Sarah that can help answer your questions. Thank you for your support and happy home buying.