4 Ways Homebuyers Can Beat High Interest Rates
Mortgage rates are at a twenty-year high, and it looks like we’re going to be dealing with those numbers for a bit longer. If you’re buying in today’s market, the interest rates are likely your top concern because they can severely impact your purchasing power.
If that’s the position you’re in right now, here are four potential ways to deal with the current interest rates.
2/1 Rate buydowns
A 2/1 buydown allows you to reduce your interest rate by 2% in the first year, then 1% in the second year, then to the normal rate for the remainder of the life of the loan. This can potentially save you a lot of money on your monthly mortgage.
Look at the example below of how your monthly payment would change on a $350,000 loan using a conventional mortgage rate of 7.35%.
The idea behind a temporary buydown is that it will give you the ability to get into a house that you want now, and when rates drop in the future (which they will) you can refinance to a better fixed rate.
What’s even better about this option is that homes are sitting on the market longer right now, so some sellers are offering to pay this as a concession. And even if a seller isn’t initially offering a concession for a buydown, you can ask for it as part of your negotiation.
Asking for a price reduction of $10,000 will save you somewhere between $65-$75 a month on your mortgage. In the example above, the rate buydown saves you nearly $500 month in your first year.
Make a larger down payment
In an ideal world, you’d be able to put down 20% for your down payment. The majority of first-time buyers aren’t able to do this, and the affordability gap that has continued to grow over the last few years have made this even more difficult. Fortunately there are loan options and buyer programs to help folks who can’t come up with 20% to get into homeownership.
But if you’re leveraging your equity from a current home or are in the fortunate position to have that much liquid capital, then putting down 20% is the way to go. You’re interest rate will be a little lower, and you’ll avoid having to pay private mortgage insurance (PMI), and on average, PMI costs range?between 0.22% to 2.25% of your mortgage. Using the $350,000 example above, you’re looking at a minimum of $150 per month, and that’s assuming you have a near-perfect credit rating.
Pay down debt / boost your credit score
Carrying consumer debt hurts your credit score, which pushes your rates up. A good mortgage lender can help you figure out a gameplan on what debts you should attack first and how you can improve your credit score so you can get a better rate. Patience and self-discipline are the keys to success here.
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Buy a fixer-upper and put in sweat equity
Buying move-in ready homes cost the most because you’re paying for the convenience of everything be done for you. It’s one of the subtle ways you’re using money to buy back future time for yourself. But that convenience comes with the top dollar price tag.
If you want to dramatically reduce your total mortgage, look at properties that need some work done on them. Most of the time the updates that need to be made are cosmetic, and with patience and a plan they can be done by you on your timeline.
There are three particular benefits I see to this approach:
The bottom line
It’s not hard to feel some despair when you’re looking at the housing market right now, but don’t lose hope. There are ways to get you from where you are now to where you want to be. I’d love to help you, so if you want to start the conversation, call or text me at 601-927-2030.
I write about topics like this and a few other fun things in my newsletter that comes out every Friday called "The Living Room." If you'd like to subscribe, you can do that by clicking here: The Living Room.