How to Purchase A Home In 2024
Overcoming High Interest Rates
For more than a decade - 2010 to mid-2022 - interest rates were suppressed below 5%. At one point they fell to 2.75%. Cheap debt, an influx of disposable income, and a strong yearning to up-size throughout the pandemic lockdown period, led to the housing market going on an upward tear. Home prices rose, median days on market fell, and sellers were pulling in countless offers above ask (asking price).
But when mortgage rates tripled between Q4 of ‘22 and Q4 of ‘23, home sales came to a screeching holt, and buyers all across the country - especially within pricier West Coast and Northeast markets - put their homebuying plans on pause.
Most of the buyers that have had their dream of homeownership sidelined, aren’t aware of the different ways that they can get their house hunting journey back on track.
This piece will expound on the four different approaches and strategies that I help my clients implement in order to overcome the barrier of high interest rates, and secure their ideal home in any housing market.
Adjust Your Mindset
As a present day homebuyer, you can’t view today’s housing market through the lens of yesterday.
Comparing the interest rate that you’d secure on a 30-year fixed mortgage in 2024, to the rate that you could have locked in 24 months ago, will do you no good.
Instead of kicking yourself, simply flip your perspective and focus on the advantages you now have. Unlike three years ago, homes are sitting on the market much longer, sellers have become far more desperate, and there’s a fraction of the competition floating around. Furthermore, home prices haven’t quite tanked, but they’ve definitely faltered. In short, the housing market has made a complete 180; swinging from the far left on the seller’s side, right into the hands of today’s buyers.
Secondly, in a high interest rate environment, it’s extremely important to keep in mind that you don’t have to hold on to the same loan forever. As interest rates move lower, you can carry out a refinance and reduce your monthly mortgage payments. This is a framework commonly referred to as: “Date the Rate, Marry the Home.”
Essentially it means: Don’t let the temporary pain of a less-desirable interest rate, detour you from your forever home. As long as it’s within your budget, go for it! You can always trade in your initial mortgage for a home loan with better terms whenever the opportunity presents itself.
Negotiate Like Never Before
Sometimes a steal falls in your lap, other times you have to create the deal you want. Whenever I’m assisting a client with a purchase, I always remind them that the listing price is simply what the Seller is asking for, it’s not necessarily the only number they’ll accept. And this is the framework that I take with me to the negotiation table.
When you thoroughly understand the various components of a transaction - price, terms, and motivation - you can better discern which levers to pull in order to move a deal forward and in your favor.
There are sellers that are unwilling to budge on price, but flexible with regard to terms. In these scenarios you can piece together a Seller Financing Agreement that beats any loan you’d secure from a lender or bank, while still giving the Seller the price they were hoping for. Alternatively, an absentee owner that’s selling a property from a distance may be motivated by a stress-free, quick close without much re-trading or back-and-forth negotiations. This is the perfect opportunity to come with an all cash or privately-financed purchase offer that has no contingencies or strings attached, but affords you a steep discount on the price.
Each scenario can be approached with the appropriate strategy that provides the most mutually beneficial outcome for both parties.
Explore All Loan Options
The standard, black and white, 30-year fixed mortgage isn’t the only loan option your lender has to offer. There’s typically a few different ways that you can add a bit of color to your financing.
Adjustable Rate Mortgages (referred to as ARMs) earned a bad reputation in the aftermath of the ‘08 Financial Crisis. But in a high interest rate environment, they can be extremely practical.
For those that fully understand the product, these loans offer interest rate flexibility. Allowing you to secure a mortgage with a lower initial interest rate, and in turn, increase your purchasing power.
Aside from the non-traditional loan options, I also encourage my clients to explore any credits and concessions their lender may be offering. You’d be surprised by how many different discounts are available. More often than not, there are various lender fee reductions and waived loan costs that can be taken advantage of.
Last Resort, Write A Bigger Check
At the most fundamental level, your mortgage is simply a loan that covers the difference between your down payment and the purchase price of a home. A lower downpayment equates to a higher monthly mortgage payment. This is because you’re borrowing a larger amount of money to cover the unpaid portion of the home.
With that being said, for those that can afford to do so, putting forth a larger down payment is always a viable means of reducing your monthly payments. The more equity you bring to the closing table, the less debt you will walk away with.
In closing, the recent surge in interest rates has reshaped the dynamics of the housing market; presenting a new set of challenges for homebuyers.
In order to navigate the landscape of a high interest rate housing market effectively, buyers must shift their mindset and become more tactical in their approach to purchasing a home.
Seller financing, adjustable rate mortgages, lender credits and concessions, and increased equity allocations (down payment), are a handful of the different ways in which today’s buyers can overcome the hurdles posed by high interest rates, and secure their next home purchase in the evolving housing market.
For expert advice and professional help with your next purchase or investment, feel free to reach out.