Calling All Homebuyers: How To Navigate A Tough Real Estate Market

Buying a house is an exciting milestone, but it can also be financially daunting. In today’s market it is particularly challenging with a perfect storm of low inventory, fierce competition, and the highest interest rates in decades. When the Federal Reserve decides to cut interest rates, monthly payments will become more affordable, but in the meantime all is not lost. Potential homebuyers do have some strategies available for interest rate reductions, so let’s explore the options here.

1. Buy Down Your Rate with Points

   • You can lower your interest rate by paying for discount points upfront. Each discount point costs 1% of the loan amount.

   • Suppose you’re borrowing $600,000. Paying $6,000 for one discount point would typically lower your interest rate by 25 basis points (0.25%).

   • To calculate your breakeven point, divide your buydown cost by the monthly savings. For example, if paying $6,000 for one discount point saves you $100 per month on your mortgage payment, your breakeven point would be approximately 60 months (5 years). You’d need to remain in the home for at least that long to recoup your buydown cost and see real savings on your loan.

2. Consider an Adjustable-Rate Mortgage (ARM)

   • An ARM offers an initial low introductory rate, typically fixed for the first few years (e.g., 3, 5, 7, or 10 years) of a 30-year loan.

   • While the initial rate is lower, be cautious as the rate may increase later based on market conditions. However, if you are considering refinancing or selling before the fixed term is up then this could make sense.

3. Opt for a Shorter Loan Term

   • Choose a shorter loan term (e.g., 15 years instead of 30). Shorter terms often come with lower interest rates. While your monthly payments may be higher, you’ll pay significantly less interest over the life of the loan.

4. Make a Larger Down Payment

   • A substantial down payment reduces the loan amount, leading to a lower interest rate. For example, if you’re buying a $800,000 home, putting down 25% ($200,000) instead of 20% ($160,000) will result in a smaller loan balance and potentially a better rate.

   • Benefits of a larger down payment also include a smaller home loan balance that creates a cushion of home equity even if market values decline, and no private mortgage insurance (PMI). Borrowers who put down 20% or more avoid PMI, which can add to monthly costs.

5. Make Lenders Compete

   • Obtain rate quotes from multiple lenders and compare the terms of their offers. Since rates have risen, the number of people buying and refinancing has dropped sharply. So lenders are eager for business and may be willing to match or beat competitors’ rates to win your business.

6. Plan for Refinancing Opportunities

   • When the Federal Reserve cuts rates, we will see favorable refinancing conditions, so be ready to act when rates decrease enough to make it worth it to refinance.

While today’s rates are hovering just above 7%, keep in mind that in October 1981 the average 30-year fixed mortgage rate was a staggering 18.5%. So while today’s rates are considerably higher than they were a few years ago, homebuyers in the 1980s faced much steeper costs. Along with evaluating financing options, negotiating with lenders, and monitoring refinancing options, this historical context may make it feel more reasonable to seize an opportunity when it comes your way.