“It’s impossible to buy a home with these interest rates!” Those of us who paid double-digit interest on our first mortgage find this sentiment amusing, but we must admit that home buyer strategy does have to adjust to buy a home successfully in this market. So let’s look at the various ways a home buyer can thrive in an environment of moderately high interest rates.
First, wrap your head around the notion that your interest rate isn’t permanent. Real estate agents have come up with a cute way of helping you see this. Many will tell you to “marry the house, date the rate.” Cheesy, but on point. Find the home you want, take the best loan you can get, and premeditate refinancing when the opportunity arises.
Let’s take a look at how today’s market conditions might impact your home buyer strategy.
Interest Rates Will Stay Up
As I wrote last month, don’t count on interest rates to come down any time soon. That won’t happen until the inflation rate drops down to an annualized rate of 2%. Since the Consumer Price Index (CPI. the most common measurement of inflation) is a backward-looking index, we won’t know we’re there until we’ve passed it by.
Where is inflation now? CPI Report Defies Hopes of Easing Inflation, for Now | Morningstar
Home Prices Won’t go Down
Some home buyers are waiting for home prices to fall. That, unfortunately, will not be a winning strategy. Bill McBride of Calculated Risk Blog might have said it best when he wrote that sellers are going on strike. Listings have declined each of the last three months. Buyers are waiting for lower rates; sellers are waiting for more committed buyers. When both supply and demand drop the volume drops, but prices stay the same –or increase.
Successful Buyers Make Realistic Offers
We all want a deal – that’s human nature. But unless you’re an all-cash buyer and can find a desperate seller, chances are you’ll pay market value for your new home. This isn’t a bad thing. Real estate is a long-term investment. Folks who buy and hold invariably end up with a great deal more wealth than those who rent and pay someone else’s mortgage.
A professional Realtor should be able to determine (within a reasonable range) the current market value of the home by looking at closed sales and competitive listings. But that’s only part of their due diligence. They should also reach out to the listing agent and ask about the sellers and why they are selling. While you shouldn’t choose the house you buy based on whether the seller is motivated or not, once you find the house you love, knowing more about the seller will help you determine your home buyer strategy.
The Successful Home Buyer Strategy
Start by looking at homes within your price range. Looking at homes that you can’t qualify for or can’t afford will waste your time, your agent’s time, and bring you frustration. Again, it’s human nature to want nicer things, but the foundation of successful home buyer strategy is to determine your affordability ceiling. Then, look at homes within your price range.
Buying a home is a high-ticket purchase. I don’t mean what you pay for the home, but rather what you pay to buy and sell a home. Between the two, expect to pay about 10% of the purchase price. If you are not terribly excited about a home, make an offer if you can get it for a price that allows you room to make the home nicer. If you find a home you love, however, do what you need to do to get in.
In that case, make your offer as strong as possible. This doesn’t always mean the highest price. If your agent has done their homework and has a good sense of the seller’s motivation, other terms might matter more. If the seller isn’t desperate to sell, however, follow your Realtor’s instincts about how much you should offer.
Get pre-approved for your financing before you make offers. Today’s market is still competitive. Your offer will not be taken seriously if you don’t have your financing in place.
If you can’t pay cash, sellers generally prefer that you are using conventional financing, rather than FHA, VA or worse, creative financing. I’m a firm supporter of our veterans, and I wish there wasn’t a prejudice against VA loans, but this is just the market. If your market is competitive and you might run in to multiple offers, conventional financing will be the most attractive.
Successful Ownership Requires Realistic Payments
Most home buyers think about buying their new home more than they do owning their new home. Our job, as your mortgage advisor, is to make sure you think about owning your new home, too. This is where your financing strategy becomes important; let’s take a look.
First, as we started out this article, marry the home, date the rate. Understand that interest rates aren’t coming down any time soon, so do the best you can with mortgage interest rates where they are today. Rates will come down eventually, and when they do, there will be opportunities to refinance to a lower rate or better terms. This has several implications.
First, don’t pay extra costs to lower your rate. You are likely to refinance within three years or so; this is a short-term mortgage. You’ll be better off taking a higher rate and reducing your up-front costs as much as possible for now. Any lender can (and should) give you options to trade off your up-front costs against your interest rate. If not, insist on it or find a new lender.
Affordable Mortgage Payment
Even with higher interest rates, there are ways to make your payment more affordable.
Let’s start by looking at adjustable-rate mortgages. (aka ARMs) The interest rate on an adjustable-rate mortgage is typically fixed for the first five or seven years, and after that it begins to adjust on an annual or semi-annual basis.
The terms of the adjustment are defined in your Note, so the bank can’t just make up your new interest rate. The interest rate for the initial fixed period is usually (but not always) much lower than a fixed-rate mortgage, and can save you thousands of dollars over the fixed period. In fact, the savings can be so large, that even if interest rates jump as high as possible, you are usually still ahead on total payments for a couple of years after the fixed period ends.
The downside to an ARM is that your interest rate and payment will adjust (either up or down) after the fixed period ends.
Another interesting product is the interest-only loan. These typically offer an interest-only payment for the first ten years, reducing your monthly mortgage payment by hundreds of dollars. The downside is that you aren’t paying down your principal balance until you pay a little more, and the interest rate is usually a little higher than a comparable fixed-rate mortgage to compensate the lender for the additional risk.
The most interesting option might be the buy-down option. Here you get a fixed-rate mortgage, but by paying a little extra up front your interest rate (and payment) are reduced the first one or two years. These are only available on conforming mortgages, but definitely worth looking into to help out with the payment shock the first year or two.
Long-Term Home Buyer Strategy
I’ll say it again – marry the home, date the rate. Rates will come down, and when they do, plan on refinancing. While no one can predict exactly when they will drop, they will come down, most likely within two or three years.
When rates drop, that’s a perfect time to refinance to get a lower interest rate, or perhaps switch to a fixed-rate or shorter-term mortgage. Just be sure it makes sense, and if you have plans to move up and rent out your existing home, be sure to take care of this before you make that move and convert your owner-occupied home to an investment property.
Buy When You’re Ready to Buy
Home buyers begin dreaming of home ownership when life events push them in that direction. Folks get married, have children, need a bigger home for a growing family, move for a new job, downsize for retirement, or simply get tired of paying someone else’s mortgage. When life’s alarm bells ring, it doesn’t mean you must buy anything and do it now; it just means that it’s time to start taking steps to homeownership seriously.
The Proper Home Buyer Strategy
If you are at a moment where it’s time to get serious, get pre-approved for a loan. It costs nothing but a little time, and you’ll know where you stand and if you have to make any changes to become qualified. Seriously, call me and let’s talk. When you find a home you love, do what you need to do to get in. The interest rate you love will come around soon enough, and you’ll have been paying down your mortgage and gaining equity in the meantime.
Casey Fleming, Mortgage Advisor and Author of The Loan Guide: How to Get the Best Possible Mortgage
About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide: How to Get the Best Possible Mortgage. Casey advises clients throughout California, and is based in the heart of Silicon Valley. He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.
This article represents the opinions of Casey Fleming, and not necessarily those of Any company or organization cited or mentioned in this web site. This analysis was prepared with the best information available at the time it was written. We do not have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither the author nor LoanGuide.com are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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