Buying a Home in a 7% Mortgage Rate World
Mortgage rates are hovering around 7%. What can a home buyer do about it?
The Federal Reserve recently raised its benchmark interest rate by 25 basis points, while the average 30-year fixed mortgage rate reached 6.95% for the week ending September 17, according to Freddie Mac. For buyers, borrowing at nearly 7% can significantly affect purchasing power and monthly payments. But it doesn't necessarily mean you should stop looking.
It means you may need to approach your home purchase differently.
Look beyond the purchase price
In today's market, home buyers may have more opportunities to negotiate with sellers. One of them is asking for a seller’s credit that can help with closing costs or an interest rate buydown. A seller or builder may also be willing to fund a temporary 2-1 or 1-0 year mortgage rate buydown, reducing the buyer's effective interest rate during the first one or two years of the mortgage.
The important thing is to look at the entire financial structure of the transaction, not just the price of the home.
Shop your mortgage
Don't assume the first mortgage quote you receive is the best one available. Get loan estimates from several lenders and compare the interest rate, monthly payment, points, lender credits, fees and total cash required to close. Even relatively small differences in rates and fees can add up over the life of a mortgage. And remember: the lowest advertised rate isn't necessarily the lowest-cost loan.
Consider buying down the rate
Another option is paying discount points upfront in exchange for a lower mortgage rate. One point generally costs 1% of the loan amount, although the rate reduction varies by lender and market conditions.
The key question is how long it will take for the monthly savings to recover the upfront cost. If you expect to own the home and keep the mortgage for many years, points may make sense. If you expect to refinance or sell sooner, they may not. Ask your lender to calculate your break-even point.
Be flexible about the house
Sometimes the answer isn't finding a cheaper mortgage. It is finding a home that requires a smaller mortgage. That might mean considering a townhome or condominium, looking at a home that needs some updating, or being more flexible about location or amenities.
New construction is another option worth exploring. Builders sometimes offer financing incentives or closing-cost assistance that can materially change the economics of a purchase. The question becomes: What are you willing to change, and what are you not willing to change? And then there is another option; wait. This may be the most important strategy of all.
You don't have to buy a house simply because you are able to buy one.
If a 7% mortgage makes the monthly payment uncomfortable, stretches your cash reserves too far, or forces you into a home that doesn't really fit your needs, waiting may be the better decision.
No one knows exactly where mortgage rates will be next year. Economic conditions can change, rates can move and your own financial circumstances may change. If you decide to wait, use the time productively. Improve your credit, increase your savings, reduce debt and learn the market. Then you'll be better positioned when the right opportunity appears.
The goal isn't to find the perfect rate
Trying to predict the exact bottom of mortgage rates or the perfect moment to buy is difficult.
A better question may be, does buying this particular home, with this particular financing, make sense for me today? For some buyers, the answer may be yes. A negotiable seller, a favorable financing package and the right home could make today's market work. For others, the answer may be, not yet. And that's okay.
The best real estate decision isn't necessarily the one that gets you into a house the fastest. It is the one that fits your financial situation, your goals and your life. In a 7% mortgage rate world, good buying strategy isn't about trying to beat the market. It's about understanding your options well enough to make a decision you will still feel good about years from now.