Purchasing real estate as interest rates continue to increase is challenging. While some potential buyers rather take a gamble and hold off to see if rates will decline or if home prices will drop to a level they can afford, not everyone has that option. Others don’t see a benefit in waiting –and they might be right.
High mortgage rates also concern potential sellers, which means fewer homes are being listed. When it comes to home prices, some areas have experienced decreases (as much as 30%), but that’s not the case in most locations. Of course, there’s also the concern of inflation, which affects other areas of life.
Yet, even in this market, purchasing property is still very much possible and achievable. Here are some ways to enter the housing market and become a homeowner amid inflation.
Look For Homes that Have Been on the Market for a While
Consider homes on the market for a month or more and make a lower offer. Remember that listing prices aren’t set in stone. Home values may be declining in that area. So going low on an offer for a home that’s been sitting for a while may be justifiable.
The seller may also be willing to help buy down your mortgage rate, which can help mitigate the impact of higher rates.
The brighter side of the current market is that buyers have more power to negotiate.
Consider Paying for Discount Points
Discount points are fees you pay upfront to lower your interest rate and are best for borrowers who plan to keep the loan for a long time. Most buydown programs offer a lower rate for the loan’s term, but others are getting more creative. For example, the "3-2-1 buydown" is where the rate is reduced by 3% for the first year, 2% for the second year, 1% for the third year, and followed by the full rate for the remaining loan term. Ask your mortgage professional to learn about what discount point programs are available.
Refinance Your Mortgage Later
As the saying goes, marry the house, but date the rate. That’s especially true in this type of market, where most homeowners will likely refinance their mortgage within the first three years.
However, that’s not always the best choice, as refinancing means resetting the payoff clock and paying closing costs all over again. Nevertheless, a lower rate also means more of the payments will go toward the principal.
Get a Mortgage with a Lower Down Payment
Several types of government-backed mortgages require low or no down payment. So instead of paying 20% for a traditional 30-year loan, an FHA loan has a down payment as low as 3.5%.
Mortgages backed by the Veterans Administration (VA loans) don’t require any down payment! There’s also a zero-down mortgage from the U.S. Department of Agriculture for people buying homes in rural areas (meaning less than 20,000 population).
These government-backed mortgages usually have lower interest rates, too.
Adjustable Rate Mortgages
There are several types of adjustable-rate mortgages (ARMs), all of which carry lower rates.
Generally, interest rates for ARMs are fixed for the first five, seven, or ten years, meaning the mortgage rate only resets (with caps on the interest rate change) after that time. They’re a good option when mortgage rates are high.