5 Ways Homebuyers Can Outsmart High Mortgage Rates
Have you been feeling overwhelmed by the rollercoaster of mortgage rates lately? With rates hitting 20-year highs and bouncing around unpredictably, it's easy to feel paralyzed by indecision. But even small rate fluctuations can cost homebuyers hundreds of dollars each month. So, what can you do to stay ahead of the curve and keep costs in check? Real estate experts and homebuyers have shared some unconventional tactics. While they may seem unusual, they're becoming increasingly common in today's unpredictable market. If you're tired of waiting for rates to drop, read on to discover clever ways to outsmart these turbulent times with pros and cons included.
1. Mortgage rate buy-downs
Buy-downs on mortgage rates have become increasingly popular as interest rates soared in mid-2022. This is because they are a simple way to reduce high financing costs. Essentially, you pay a lump sum upfront to decrease the monthly interest rate for the first few years of the loan. The seller of the property or the homebuilder may make this payment, or it can be you. The 2/1 buy-down is one of the most sought-after options, where you pay an upfront fee to lower the first-year interest payments by 2% and the second-year interest payments by 1%. The original rate kicks in by year three.
Many homebuyers opt for buy-down options, hoping to benefit from refinancing to a lower rate in the future. According to real estate agents and lenders, the best buy-down option for you depends on your budget and financial needs. In Denver's local market, sellers still hold a strong position, which may limit your chances of getting concessions, so it's essential to be realistic about your expectations.
2. Seller financing
Are you considering purchasing a home, but don't want to deal with a bank? Seller financing could be the solution for you. Essentially, the seller offers a loan to the buyer, who pays them back with interest. This benefits the buyer with a potentially lower interest rate than what a bank would offer, while the seller earns interest higher than what a savings account or CD would yield.
According to Josh Dobson, a lender at Bluprint Home Loans in Modesto, CA, seller financing can work well for both parties, especially if the seller doesn't want a lump sum of cash. However, experts caution that it's important to take proper precautions, such as having attorneys draft the agreement and making sure property taxes and the title of the home are handled correctly.
Although there are some consumer protections under state law, it's still important to be aware of potential risks. For example, if you choose seller financing, you may not be eligible for traditional bank products or homeowner protections like forbearance programs during emergencies like the COVID-19 pandemic. Overall, seller financing is an interesting alternative that's worth considering.
3. Buying a home to double as an investment property
Are you tired of struggling to find an affordable dream home? Consider buying a property that doubles as an investment. This approach has been tried and tested, and it's making a comeback today. Instead of searching for a single-family home, you could buy a duplex or a property with an accessory dwelling unit and rent it out. Financing isn't an issue either—20% down isn't necessary, and you could finance with as little as 3% down.
However, there are many factors to consider. Some lenders and mortgage programs allow you to apply the expected rental income towards getting a larger mortgage, while others don't. The type of rental income also varies, with some lenders only considering long-term rentals for income. Additionally, some cities and states impose strict requirements when it comes to short-term rentals.
Being a landlord also comes with its responsibilities, such as dealing with tenants and maintenance. But the good news is that many expenses that come with homeownership are now business expenses, and therefore tax-deductible. Investing in a property can be counterintuitive, but it's a worthwhile opportunity that you might want to consider.
4. Down payment assistance & first-time buyer programs
Discover an underutilized strategy for purchasing a home - utilizing the numerous down payment assistance programs available throughout the country. With nearly 2,000 programs to choose from, this option could be the best-kept secret in home buying.
Despite misconceptions, these programs are not solely for first-time buyers, although specific resources do exist for them, too. Rather, buyers of all sorts can find programs conveniently located in their area through the website Down Payment Resource. Additionally, each state also contains a Housing Finance Agency that can provide valuable resources.
These programs include options to help with down payments, first-time buyer assistance, closing cost assistance, and more. Of course, eligibility requirements may vary, like living in certain areas or holding the home as your primary residence after purchase. Therefore, it is essential that you comprehend all the requirements before applying. Moreover, private lenders may offer similar programs, with possibly less restrictive guidelines than HFA programs. Here are some examples of down payment assistance programs:
5. Bridge Loans
Are you planning to buy a new home but still in the process of selling your current property? A bridge loan can help make the transition smoother and faster. This type of loan allows you to purchase a new home, using your old property as collateral until it's sold. Once the old home is sold, the loan is seamlessly converted into a mortgage for the new home. While the loan might cost you an origination fee of 2 percent and an interest rate approximately 3 percent higher than a conventional loan, it can facilitate a quicker move-in timeframe of around 90 days.
