Background: Interest rates increased from 3.250% on January 1st to 5.875% to end the quarter. With this 2.5%+ increase, buyers have seen monthly mortgage payments soar 36%, thus a $750K purchase now costs $938 more per month. We have recently received a dozen questions from potential buyers concerned about interest rate affordability…
Q: I want to buy a home, but I’m scared of where interest rates are now. My current mortgage has a much lower rate and I don’t know if I should just stay put in my current home rather than buy. What loan purchase options do I have?
A: Great question! There are several options we can choose from based uponyour particular situation. Some of them include:
1) Buy a New Home and Hold onto Your Current Home as an Investment Property. This strategy allows you to keep (and take advantage of!) your current home's low interest rate by holding onto it. There may also be an opportunity to tap the equity in your current home and use it as a down payment for your purchase. We always advocate that our clients become real estate investors, which is why this is option #1.
2) Obtain a Standard Mortgage and Refinance Later. Purchase a home with current interest rates being what they are and plan to refinance when rates come back down, while responsibly and conservatively budgeting your personal finances with the expectation that you will not keep that interest rate indefinitely.
3) Obtain a 2-1 (or similar) Buydown. Purchase a new home and ask the seller to buy down your rate for the first two years. In this situation, your starting interest rate will be reduced by 2% in Year 1 and by 1% in Year 2. Starting in Year 3, you’ll pay the full interest rate for the remainder of your mortgage. For this feature, the seller pays the lender around 2.0% of the total loan balance.
In addition to a 2-1 buydown, there are other buydowns as well, including 3-2-1 and 1-0 buydowns. **Note: we only assist our clients with obtaining buydowns when they have a long-term strategy and we are confident they will not sacrifice their long-term financial futures.
For instance, we may plan on refinancing after Year 2 (presumably when interest rates are lower), while conservatively planning to keep the full interest rate indefinitely if rates stay at their current levels. Another instance would be if we know the buyer’s income will increase significantly over the next couple years, thereby the higher mortgage payment under the full interest rate will fit easily into their future budget. We never advocate for a buydown when buyers are at risk of not affording the full interest rate in Year 3 and beyond. We are fiduciary advisors, not sales agents.
4) Other Options. Depending upon the buyer’s specific situation, there are other options we can deploy.
5) Stay Put in Your Existing Home. Depending on where you are in life and what your goals are, this could definitely be the best option for you!
Contact us anytime you have a real estate-related decision or question – quitclaim deed transfers, renovation ideas, investment property questions, etc. We’re more than just Realtors, we’re real estate advisors.