Most potential home buyers know the basics. You can secure a lower interest rate by improving your credit score, making a larger down payment or shortening the loan term. But with interest rates for a 30-year loan currently at 6.77 percent, sometimes it takes more.
With more sellers than buyers in the market right now, more than any other time on record, the high interest rate is what’s standing in between an aspirant buyer and a home. “The people buying now are kind of the smart ones,” said Adrienne Herzog, a Colorado real estate agent. “The people who are out there now have a lot more inventory to pick from, and they have a lot more power to negotiate.”
Experts have some ideas on buying a home despite high interest rates, from paying upfront for a lower rate to seeing what the government has to offer as a loan. Here are the pros and cons.
Shop around
Pros: Comparing the rates that different lenders offer can save home buyers when rates are high. You have little to lose in asking. Now is the time to test your negotiating prowess.
Cons: Usually, every time you apply for a loan, your credit score takes a hit. But if you apply for mortgages at multiple lenders within a short time frame — 14 to 45 days, for example — you can minimize the impact. It’s also easy for buyers to compare apples to oranges, so you should study the offers side by side and ask lots of questions.
Lock in the rate
Pros: Lenders may offer a rate lock for 30 to 90 days after you’ve signed a purchase agreement with them, which can protect home buyers from seeing their rate creep up before they are even in the home.
Cons: Some lenders charge a fee to rate lock. And if rates go down in the interim, you may not come out ahead.
Seek a government-backed loan
Pros: U.S. government programs can help buyers secure more favorable loan terms. The most common is an FHA loan, which is great for first-time buyers and those with poor credit or little to contribute to a down payment. But there are also programs for veterans, American Indians or Alaska Natives, rural home buyers, emergency personnel and teachers, and energy-conscious home buyers.
Cons: Not every home or every buyer qualifies. FHA loans also require borrowers to pay mortgage insurance premiums through an upfront fee at closing, which might not be a good deal over the long run.
Buy discount points
Pros: Mortgage points, or discount points, are fees you pay the lender upfront to get a lower monthly interest rate on the loan, a solid solution for buyers when rates are high.
Cons: Closing costs will end up higher. And if you won’t be in the house for long — under five years, for example — then you might not recoup your money. Use a free online calculator to find your “break-even point.”
Consider a temporary buy down
Pros: With a temporary mortgage rate buy down, for an upfront fee, the buyer’s interest rate drops for the first few years. The “3-2-1” loan is a common form, where the rate drops by 3 percent in the first year, 2 percent in the second, and 1 percent in the third, before bouncing back to the original rate.
Cons: If the seller or lender pays for it, great, but that’s not always the case. And, in essence, it’s kicking the ball down the road, as the rate will return to its original rate after a set number of years.
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