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

There is no coating: it’s a terrible time to buy a house.

Mortgage rates for a 30-year fixed-rate loan are now hovering above 7%, more than 4 percentage points higher than a year ago. This reduced the purchasing power of a typical buyer by 14%, according to Black Knight, a mortgage data company.

With fewer people able or interested in buying now, home sales have plummeted. Just 16% of people say now is a good time to buy a home, a record high, according to a monthly survey conducted by Fannie Mae in October.

Yet that has barely made a dent in house prices, which have hit new highs during the pandemic and are only falling from all-time highs.

Another thing holding back sales is the stubbornly low inventory of homes available for sale, said Jackie Lafferty, realtor at Baird & Warner Real Estate in Chicago.

“It’s something I’ve never seen a combination of, this lack of inventory and higher interest rates,” Lafferty said. “There is no motivation for people to move unless they have to.”

But whether people need to move because of a new job, divorce, addition to the family, or just don’t want to give up after years of trying to buy a home, there there are always buyers.

“Even if sales slow down, real estate doesn’t stop,” Lafferty said. “People need a place to live.”

For those in a hurry, here are some ways to avoid buying a home.

Buyers who take out a mortgage now do so with the hope that within a few years rates might drop significantly and they could refinance at a lower rate.

“Yes, rates have risen much further and faster than anyone expected,” said Melissa Cohn, regional vice president of William Raveis Mortgage. “But if you can afford to buy today and you want and need it, you shouldn’t let the higher rate environment stop you, knowing that at some point in the next year, two years at most, rates will likely be considerably lower.”

The wrong side: You will still have to bear the higher rate at this time. There is a risk that interest rates will not fall, or at least not much. And if mortgage rates don’t come down, you could be stuck for a while, said Delyse Berry, CEO and principal broker at Upstate Down in Rhinebeck, New York.

“There could be a rate cut in the middle of 2023,” she said. “If that happens, you can refinance and get a lower interest rate and lower payments. But those rates could now be the new cost of doing business.

In addition, refinancing can be extremely expensive. Typically, closing costs are between 2% and 5% of the principal amount of the loan.

And unforeseen events can prevent you from refinancing, such as the loss of your job or the loss of value of your home.

More and more homebuyers are exploring options other than the standard 30-year fixed rate mortgage. For example, variable rate mortgages, or ARMs, now account for 12% of mortgage applications, up from 3% a year ago, according to the Mortgage Bankers Association.

While the average rate on a 30-year fixed rate loan was 7.08% last week, the rate on the 5-year Treasury-indexed hybrid variable rate mortgage was one percentage point lower than 6.06%, according to Freddie Mac. Although they are still 30-year loans, ARMs offer a fixed rate for a set period – usually 5, 7 or 10 years – after which the interest rate resets to current market rates.

“Buying today is about figuring out what you can do to fill this high-rate environment so you feel comfortable with your acquisition,” Cohn said. “When rates drop, it’s time to see what your most permanent solution will be.”

For buyers who may be moving in 5-7 years anyway, an ARM can be a way to increase buying power.

“For the first 5 or 7 years of an adjustable rate mortgage, it walks, talks and acts like a fixed rate mortgage,” Cohn said. “It has a lower rate and payment because the bank only guarantees it for a shorter period.”

If rates drop, an ARM could be reset at a better rate.

The wrong side: Borrowers must also accept the risk that rates could be even higher when the loan is reset, or at any time during the life of the loan. After the set period, ARMs can be reset annually or every six months.

However, most have caps on how much a rate goes up or down during each reset period and on how long the loan lasts, so it’s important to understand how your loan works.

Borrowers can lower their payments by paying more up front to buy out their mortgage rate. This will reduce the loan interest rate, either permanently or temporarily.

While a permanent buyout changes your rate for the life of a loan, a temporary buyout offers lower rates for a period of time.

On a temporary buyout, borrowers generally benefit from two percentage points on the loan rate for the first year, one percentage point for the second year, and in the third year the loan reverts to its original rate. origin for the remainder of its term. Until then, many borrowers expect interest rates to drop, leaving the possibility of refinancing open.

“That’s a significant difference for the first year of the loan, lowering your rate from 7% to 5%,” Cohn said.

The wrong side: While it’s great to get a lower interest rate, it means shelling out more money up front. It might not make sense financially if you don’t plan on staying in the house for long.

“It takes about five years to break even by redeeming one point,” Cohn said. “Knowing that rates will likely be much lower by then, you might be better off taking the money you’d be using to pay points to pay for a refinance later.”

In some housing markets, competition among buyers has eased and sellers are being forced to be more flexible on offers.

One of the ways a buyer can reduce their payments is to request a credit or concession from the seller as part of the transaction. Buyers can then use this money to lower their mortgage interest rate and lower their monthly payments.

“Sellers are willing to negotiate more now than they have in the past,” said Trudy Kelly, senior home loan specialist at Churchill Mortgage in Oregon.

In September, when mortgage rates were around 5.75%, Kelly worked with borrowers buying a $590,000 home. Rather than offering $15,000 or $20,000 below the asking price to reduce the cost of monthly payments, buyers demanded a seller’s concession of $15,000.

If the buyers had made the lowest bid and got the house for $575,000, their monthly savings would be $78, Kelly said. But by reducing the interest rate by one percentage point, their payments dropped by $340 per month.

“It’s a huge difference,” she said. “At the end of the day, what it did for them was increase their budget. It lowered their debt ratio, which gave them more purchasing power. It puts them in a machine to travel back in time and bring them back to April or May [when rates were lower].”

The wrong side: In many areas, it’s still a seller’s market. Applying for a credit or concession may be less attractive to a seller if they have other offers.

If you have the money to buy a house, now is a good time to do so. Not only will you avoid paying a high mortgage rate, but you’ll likely be able to negotiate a better price.

But few people can afford cash: 97% of buyers in the past year have needed to finance their homes, according to a recent report from the National Association of Realtors.

Even if you don’t have enough for an all-cash deal, spending more money on the down payment will lower your mortgage amount, lower your monthly payments, and mean paying less interest over the term. of the loan. If you own your current home, you can leverage some of the money from your sale or maybe even leverage the equity to increase your down payment.

By making a bigger down payment, you’ll not only reduce your loan balance, but also increase your home’s equity, money you can get back when you sell – assuming the property appreciates.

The wrong side: Using cash for a real estate purchase is always a trade-off, as you will have to give up other potential investments. And for most buyers, coughing up more cash just isn’t an option. The typical down payment for first-time buyers was 6%, while it was 17% for repeat buyers. according to the National Association of Realtors.

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