Mortgage rates have recently reached their highest levels in over two decades, posing a challenge for those looking to purchase a home. Nonetheless, whether out of necessity or desire, numerous individuals continue to pursue homeownership every month. With the 30-year fixed-rate mortgage surpassing 7%, NerdWallet sought guidance from real estate professionals and mortgage experts on strategies for homebuyers to make the most of their purchasing power in this period of elevated interest rates. Here are nine approaches they recommended:
1. Request a Mortgage Rate Reduction from the Seller
In response to the surge in interest rates in early 2022, temporary mortgage rate buydowns have become increasingly common. This involves the seller covering a portion of the buyer's upfront interest payments, effectively reducing the monthly payments for the first one, two, or three years of homeownership.
John Bianchi, Executive Vice President at loanDepot, suggests that negotiating a temporary buydown with the seller can help alleviate the impact of high interest rates, reducing monthly payments for an initial period.
2. Allocate Part of Your Down Payment to Debt Reduction
Sometimes, it makes financial sense to allocate a portion of your intended down payment to pay off high-interest debts such as credit cards, car loans, or student loans. This may result in a slightly higher mortgage payment but reduces the overall debt burden, making the home purchase more affordable.
3. Utilize Homebuyer Assistance Programs
Many state and local governments offer programs designed to make homeownership more attainable for first-time buyers. These programs may provide down payment assistance, help with closing costs, favorable interest rates, or tax credits, depending on location and eligibility criteria.
4. Consider Seller Financing
Seller financing involves giving the seller an IOU for a portion of the home's value and making monthly payments to the seller at an interest rate lower than what a traditional bank might offer.
Janie Coffey, a real estate professional in St. Augustine, Florida, explains that sellers may agree to this arrangement to secure the price they desire while offering buyers a more favorable interest rate. Seller financing typically has a set end date, after which buyers must secure a traditional mortgage.
5. Act Promptly, Even if the Interest Rate Isn't Ideal
If you find a home with affordable payments (even if the interest rate isn't ideal), it may be wise to proceed with the purchase. Waiting for lower rates may result in increased competition, driving up home prices and negating the advantage of a lower interest rate.
6. Focus on the Essentials, Not Extras
Simplify your offer when dealing with sellers who seek flexibility in the closing date or request repairs. Concentrate on offering the best terms for the home's price, including an "as-is" purchase, accommodating the seller's preferred closing date, and demonstrating your financial strength through preapproval letters and account balances.
7. Consider a Fixer-Upper
Purchasing a fixer-upper can be a cost-effective approach. You can slowly renovate and improve the property over time or obtain a renovation loan to address the necessary repairs upfront.
8. Explore New Construction
Building a new home provides predictability in terms of move-in dates, cost, and long-term savings by avoiding expensive renovations, appliance repairs, and unforeseen maintenance issues associated with older homes.
9. Implement "House Hacking"
Consider the concept of "house hacking," which involves buying a property like a duplex, living in one unit, and renting out the others. Expected rental income from additional dwelling units can sometimes be included when qualifying for a mortgage.
While mortgage rates are currently high, creative strategies can help make homeownership more affordable in these challenging times.
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