Mortgage rates have risen to their highest levels in more than 20 years, making it harder to afford a home. And yet, out of necessity or desire, hundreds of thousands of people buy homes every month.
Here is some advice on how home buyers can stretch their dollars in this time of high-interest rates.
1. Ask the seller to reduce the mortgage rate
Temporary mortgage rate buydowns have become commonplace since rates surged in early 2022. With a temporary rate buydown, the seller pays a portion of the buyer's interest payments upfront. This reduces the house payments for the first one, two or three years of ownership. Some home buyers should seriously consider offering a more generous price to the seller in exchange for a large closing cost concession and then use those funds to buy down the interest rate as much as possible.
2. Use part of your down payment to pay down debt
When you apply for a mortgage, the lender considers your total debt payments for the house, car, student loans and credit cards. Sometimes it makes sense to divert some of your intended down payment money to cut the higher-rate debt first, said David Kuiper, vice president and senior mortgage banker for Dart Bank in western Michigan. "While the mortgage payment will be slightly higher, the total debt/payments is lower, making the proposed purchase more affordable," Kuiper said.
3. Use home buyer assistance programs
State and local governments sponsor an abundance of programs to make homes affordable for home buyers, especially first-timers. Some programs offer down payment assistance and help with closing costs. Others offer favorable interest rates or tax credits. Details differ from state to state. Some programs are targeted to certain counties, cities or neighborhoods. Others are intended for specific groups of people, such as teachers, first responders or renters who live in public housing. Some programs have income limits.
4. Ask the seller to finance the purchase
You can give the seller an IOU for part of the home's value and make monthly payments directly to the seller at an interest rate that's lower than you could get from a bank. This arrangement is called "seller financing" and has its roots in the early 1980s, when mortgage rates zoomed as high as 18%. Seller financing is complex.
5. Don’t wait for a rate you like better
If the right house comes along and the payment is affordable (even if you don’t like the interest rate), you should buy the house. You often hear that you should buy now and refinance someday after interest rates fall. If mortgage rates fall, more buyers will rush into the market. They'll make competitive offers and drive home prices higher, essentially wiping out any advantage of the lower interest rate.
6. Rent out part of the house
If you buy a duplex, triplex or quadplex, and you live in one unit, you can include the expected rental income for the others when qualifying for a loan. In some cases, you can qualify for a mortgage using expected rental income from an accessory dwelling unit, such as a basement apartment or a tiny house in the backyard.
If you buy a home today, you're stuck with high mortgage rates for the time being. But by employing some creativity, you might find a way to afford homeownership. Reach out to Marks Realty Group if you have any questions, we're here to help.