Counseling Home Buyers in a Tough Market
I’ve seen a lot of ups and downs in the market during my 30+ years in the mortgage industry but perhaps none more challenging than what we’re experiencing now. That’s not very comforting to buyers, sellers or my colleagues in the industry, I know.
The rise in interest rates (hovering around 6.5% to 7%), paired with high prices driven by the short supply of homes for sale, make homes less affordable to home buyers. This is unlike 2008, when interest rates were high and home prices crashed. Then, buyers could keep their monthly payments in check despite carrying a higher interest rate on their mortgage.
Do not despair if you’re planning to buy soon. There are creative ways to get the most house for the least amount of money:
Can you wait?
I anticipate two positive market developments in the next 6 to 12 months: I think home prices will begin to moderate and mortgage rates will trend down some. Historically, when interest rates rise very quickly, as they did this past fall, rates also tend to recover more quickly. Waiting for 6 months or a year before buying could help make financing a new home a little less painful. Buyers can use that time to squirrel away a larger down payment and pay off debt to be able to afford more house when the time comes.
Think payment, not interest rate.
Sometimes buyers’ situations don’t give them the luxury of waiting. Young couples have a growing family. Executives are relocating. Rent is increasing. I always counsel buyers to focus on their payment rather than the interest rate.
Budgeting is key regardless of the market but more important when payments are higher than a buyer expected. If they don’t have one already, buyers need a budget to determine what monthly mortgage payment they can realistically afford.
A budget can help buyers see where their money is going. If a couple has $2,500/month in income and current expenses of $1,000, I encourage them to save that extra $1,500 a month for a down payment. They may not even realize how that extra $1,500 is being spent.
Consider an FHA mortgage.
For those who qualify, FHA mortgages can be a great alternative to a conventional mortgage when a borrower has limited money available for a down payment or tarnished credit. They also offer lower interest rates. The trade-off is there are more stringent criteria for the homes being purchased and borrowers are required to get mortgage insurance.
Or an ARM.
Adjustable rate mortgages make a lot of sense in today’s market. A standard 5-1 ARM gives borrowers a fixed interest rate for the first 5 years of the loan at a lower than a conventional mortgage and then adjusts up or down annually based on current market conditions. Currently, 5-1 ARMs are more than a full 1% lower than conventional mortgages. Many borrowers take out an ARM with the mindset that they will refinance to a conventional mortgage when the market recovers.
Buy Downs – Yay and Nay.
Keep in mind, sellers may be more willing to make concessions in today’s neutral market. They may help buy down a borrower’s rate or cover closing costs to help a deal come together.
On that note, be leery of lenders offering to buy down interest rates for the first year of a mortgage. A 1% rate cut for the first year is typically offset by fees elsewhere in a financing package.
I’m hopeful that the current market is short lived. We have had a strong market since 2010 – rates were trending down, home values were going up, and the fundamentals for lending improved – but we know the real estate market and mortgage interest rates are more cyclical than the economy itself. It always “only a matter of time” before the cycle begin again.
With creativity and patience, buyers can work within today’s challenging dynamics to get their new house. I welcome your comments below or you can email me at email@example.com.