Home News It’s a terrible time to buy a house. Here’s what to know if you have to do it anyway

It’s a terrible time to buy a house. Here’s what to know if you have to do it anyway

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Don’t spoil it: This is a terrible time to buy a home.

Mortgage rates for 30-year fixed-rate loans are now flat 7% or more, more than four points higher than a year ago. According to Black Knight, a mortgage data company, this has reduced the purchasing power of the typical buyer by 14%.

Home sales are slowing down as fewer people are available or interested in buying right now. fallAccording to Fannie Mae’s monthly survey in October, just 16% of people said now is a good time to buy a home, a record low.

Still, it has had little impact on home prices, which surged to new highs during the pandemic and are now just slightly below all-time highs.

Another factor holding down sales is a stubbornly low inventory of available homes, said Jackie Rafferty, a realtor at Baird & Warner Real Estate in Chicago.

“I have never seen a combination of low inventories and higher interest rates,” Mr. Rafferty said. “There is no incentive for people to move unless necessary.”

But whether people need to move for a new job, a divorce, an addition to the family, or simply don’t want to give up after years of trying to buy a home, there are still buyers out there. is.

“Even if sales drop, real estate doesn’t stop,” says Rafferty. “People need a place to live.”

For those in a hurry, here are some ways to take the pain out of buying a home.

Buyers who currently take out mortgages do so in the hope that in a few years interest rates will drop significantly and they will be able to refinance to a lower rate.

“Certainly, interest rates are rising much faster than anyone expected,” said Melissa Cohn, regional vice president at William LaVace Mortgage. If you need it, you shouldn’t let the higher interest rate environment stop you knowing that at some point next year, two years at most, interest rates are likely to fall significantly.”

Disadvantage: For the time being, we will have to endure higher rates. There is a risk that interest rates will not go down, or at least not go down significantly. Deris Berry, CEO and principal broker of Upstate Down in Rhinebeck, N.Y., said it could stay that way for a while if mortgage rates don’t go down. rice field.

“Interest rates could go down in mid-2023,” she said. “Once that happens, we can refinance and secure lower interest rates and payments. But these fees can now become the new cost of doing business.”

Additionally, refinancing can be very costly. Closing costs are typically 2% to 5% of the principal amount of the loan.

Refinancing may also be hindered by unforeseen events, such as losing your job or losing the value of your home.

More homebuyers are looking for options beyond the standard 30-year fixed-rate mortgage. For example, according to the Mortgage Bankers Association, variable rate mortgages (ARMs) now account for 12% of mortgage applications, up from 3% a year ago.

Last week, the average interest rate on 30-year fixed-rate loans was 7.08%. 5-Year Treasury Indexed Hybrid Adjustable Rate Mortgage It was a full percentage point drop at 6.06%, according to Freddie Mac. ARM he is a 30 year loan but offers a fixed interest rate for a period of time (usually he is 5, 7 or 10 years) after which the interest rate resets to the current market rate.

“Buying today is about figuring out what you can do to get through this high interest rate environment and get comfortable with acquisitions,” Cohn said. “Once interest rates fall, it’s time to consider more permanent solutions.”

For buyers who may leave home in five to seven years anyway, ARM may be a way to increase their purchasing power.

“For the first five to seven years of a variable-rate mortgage, you walk, talk, and act like a fixed-rate mortgage,” Cohn said. “Banks are guaranteeing for a shorter period of time, resulting in lower interest rates and lower payments.”

If the rate drops, ARM can reset to a better rate.

Disadvantage: Borrowers must also accept the risk that interest rates may rise further when the loan is reset or at any time during the life of the loan. After a period of time, ARM he can reset every year or every 6 months.

However, it is important to understand how loans work, as most have caps at which the interest rate can go up or down during each reset period and for the life of the loan.

Borrowers can reduce their payments by increasing their advance payments to lower interest rates on their mortgages. This reduces the interest rate on the loan permanently or temporarily.

A permanent buydown changes the rate for the life of the loan, while a temporary buydown offers a lower rate for a period of time.

In a temporary buydown, the borrower typically takes 2 percent off the loan rate for the first year, 1 percent for the second year, and by the third year the loan returns to the original rate for the remainder of the term. By then, many borrowers expect interest rates to fall, leaving them open to refinancing.

“That’s a meaningful difference for the first year of the loan, with interest rates going from 7% to 5%,” Cohn said.

Disadvantage: Lower interest rates are very attractive, but it means paying more money up front. It may not make sense financially if you don’t plan to stay in the house for an extended period of time.

“It takes about five years to reach breakeven even if you pay one point,” Cohn said. “Knowing that interest rates are likely to be quite low by then, it might be better to pay the money used to pay for the points later to refinance.”

In some housing markets, competition among buyers has eased, forcing sellers to offer more flexibility.

One way a buyer can reduce payments is by requesting a seller credit or seller concession as part of the transaction. The buyer can use that money to lower the mortgage interest rate and lower the monthly payment.

“Sellers are negotiating more aggressively than they used to,” said Trudy Kelly, a senior mortgage expert at Churchill Mortgage in Oregon.

In September, when mortgage rates were about 5.75%, Kelly worked with a borrower to buy a $590,000 home. Rather than offer him $15,000 or he $20,000 less than the asking price to reduce the cost of monthly payments, the buyer asked the seller for a concession of $15,000.

If the buyer puts in a lower offer and gets the house for $575,000, the monthly savings would be $78, Kelly said. However, by lowering the interest rate by 1 percentage point, the monthly payment decreased by $340.

“That’s a big difference,” she said. “Ultimately, what it did for them was an expanded budget. back to the moon [when rates were lower]”

Disadvantage: In many areas it is still a seller’s market. Asking for credit or concessions may not be very attractive if the seller has other offers.

If you have the money to buy a house, now is your chance. Not only can you avoid paying high interest rates on your mortgage, you may be able to negotiate a better price.

However, not many people can pay with cash. According to a recent report by the National Association of Realtors, 97% of homebuyers in the past year had to finance their homes.

Even if you don’t have enough money for an all-cash deal, increasing your down payment will result in a lower mortgage amount, lower monthly payments, and less interest over the life of the loan. If you own your current home, you can also leverage some of the cash from the sale or tap equity to increase your down payment.

By paying a higher down payment, you can increase your home equity as well as reduce your loan balance.

Disadvantage: Using cash to purchase real estate is always a trade-off as you should refrain from other potential investments. And for most buyers, coughing up more cash isn’t an option: the usual down payment for first-time buyers was 6% for him, while for repeat buyers he was 17%. According to the National Association of Realtors.

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