Today’s high interest rates are keeping many would-be buyers on the sidelines. Real estate sales are down 15.3% from the previous year of 2022, which were already down from the year before that. Today’s interest rates currently average 7.61% – a big jump from just a year ago when the average was 5.34%. But some buyers simply must make a purchase now, regardless. Learning clever ways to hack high interest rates can help. Following are ways you can help your clients get some relief.
Granted, you are a real estate agent, not a mortgage broker. But if you want to be the go-to agent in your area, you need to be well-versed in today’s financing options. And more than ever, these options center around interest rates.
STRATEGY #1: Ask for a Rate Buydown
Your buyers have found the house they need, the sellers are motivated, and you are ready to write the offer. But the interest rate is making monthly payments a stumbling block. Consider asking the seller for a rate buydown. “Rate buydowns that are paid for by sellers and builders are becoming fairly common to help drive home sales,” says Amit Patel, senior product manager for consumer lending at BMO Financial Group. If the seller agrees, a “concession” will be taken out of the purchase price and applied to the lender as a way to finance an interest rate reduction. These reductions can either be permanent or temporary. For example, a 2/1 buydown will reduce the interest rate by 2% for the first year, then 1% for the second, and then the full rate after that. Keep in mind your buyer will need to qualify at the start for the full rate.
STRATEGY #2: Buy Points from the Lender
At any given moment, there are multiple interest rates buyers can choose from. One way to lower the interest rate is to purchase “discount points” up front. This requires cash, but it can reduce monthly payments considerably. Your buyers should count on spending up to 1% of the loan amount for a 0.125% – .05% interest rate reduction. For example, if they are buying a home for $454,900 at 7% with an average 6% down payment, the monthly payment would be $2844. With a rate reduction of 1%, the monthly payment amount would be lowered by $300. One caveat: make sure the buydown makes sense in terms of time. The best way to figure this out is to do the math: “If buying points saves you $300 per month and costs you $9,000 upfront, then your breakeven point would be 30 months (9,000 divided by 300). If your buyers don’t plan to stay in the home that long, it’s probably not worth it.” (Aly J. Yale, Money)
STRATEGY #3: Shop Around
Purchasing a home loan is similar to purchasing a car – you can negotiate for a better deal, especially if you shop around. Typical options include a mortgage broker, a bank or a credit union. A broker is a middleman who works with multiple wholesale mortgage companies and can custom-fit a loan to particular needs. A bank on the other hand will originate, process, and fund the loans themselves (Quicken and Rocket Mortgage are two examples of bank loan entities). Credit Unions are non-profit and typically don’t sell their loans so can offer competitive terms. Counsel your clients to get quotes from more than one type, for example a bank and a broker, and then compare. If your buyers have decent credit scores (600 and up) and W2 employment, a bank will typically be competitive and quick. But if there are extenuating challenges, a broker could be a better option. (Gina Freeman, The Mortgage Reports) Each lender will send a loan estimate, which is a standard form and easy to compare side by side.
STRATEGY #4: Assume the Seller’s Mortgage
Redfin estimates that 85% of homeowners have a mortgage of less than 5%. This makes the possibility of assuming the loan very attractive. Assuming the seller’s loan is only possible for some kinds of loans. These include VA, USDA and FHA. This means your buyers will take over the loan payments.Your buyers will also need to bring the equity amount in cash to the table. For example, if the seller has a house at $300,000 but owes $230,000, your buyers would need to bring $70,000 for the sellers. It’s a nice selling point if you are the listing agent and your clients have an assumable loan. Keep in mind that buyers will need to meet the requirements of the existing loan. This means if it’s a VA loan, the buyer will need to be in the service or be a veteran. Both sellers and buyers will have to work with the existing loan servicer to proceed in the correct way. Finally, this option often takes more time to close, up to 90 days or more.
STRATEGY #5: Put More Money Down
The driver of this interest-rate-reduction strategy is all about LTV (Loan-to-Value ratio). More money down means less money to lend. This leads to a lower interest rate. With today’s inflated market, this can be a challenge for buyers. Creative ways to raise money include selling an aged car, cashing in on stocks, or using a down payment assistance option. This often doesn’t need to be repaid, and is a great option for first-time home buyers.
STRATEGY #6: Consider Other Types of Loans
Your buyers should consider other loan options, such as Adjustable Rate (AR), Government-Backed loans, and Short Term Loans. In many cases, buyers can get a 1% rate deduction on 5 – 7 year ARM loans. These options make the most sense when your buyers are planning to live in the home for only 3 – 10 years. Caveat: make sure the timeline matches the benefits these loans can offer, and/or buyers are prepared to refinance when the loans come due.
STRATEGY #7: Buy a Fixer
Statistics show that today’s buyers predominantly only consider turn-key properties. As such, buyers will be paying top dollar. With today’s high interest rates, monthly payments at top dollar can quickly get out of hand. Suggest a fixer-upper as a way to save money now but still have a place to live. As long as it’s in a good location and has good bones, it should end up being a great longterm investment. Your clients can live in the home now and when rates come down, get financing to update and/or fix up the house to their taste later.
STRATEGY #8: Rent Out Part of the House
Passive income in the form of rental income is never a bad idea. To combat high monthly payments due to high interest rates, encourage your buyers to consider duplexes or properties with ADUs. The rental income can help off-set today’s higher monthly house payments. Your clients can also use the expected extra income to better qualify for a loan.
The real estate business requires agents to wear many hats. Being knowledgeable about financing options so you can guide your buyers and sellers can really make a difference. Knowing home financing options is also a great way to navigate your own personal financial picture. Develop expertise in the financial arena of the real estate transaction and watch your business grow.