One of the top regrets buyers have right now is they feel their interest rate is too high and they didn’t know about programs available to lower it before buying. Right now in 2023 interest rates are high, most buyers have a rate of 6.5-7% which is a long way from the 2.5-3% we saw in 2020 and 2021. First, it’s important to note those 2.5-3% rates are not normal and will likely never happen again. That was a truly once-in-a-lifetime opportunity. Second, these 6.5-7% rates are not normal either and will eventually go back down based on historic data. Lastly, there are numerous programs available to lower your interest rate 2-3% right now. These programs are nothing new, but they are getting a lot of interest now because we haven’t needed lower rates in a while.
When Will Rates Drop?
This is the #1 question right now because it impacts the housing market so much. Here’s a general breakdown of it. As of right now, July 2023, the latest data shows that mortgage rates are most likely peaking right now. Most analysts expect rates will start to drift a bit lower by the end of this year.
This doesn’t mean that they are going to go back down to the record lows of 2-3% we saw recently, again those rates are likely gone forever and were clearly a historical outlier. Many experts I follow in the lending and banking space say the sweet spot for interest rates in this market right now – which is mostly based on current generational demand from millennials and inventory shortage estimates which put the US anywhere from 3-7 million homes short – are most likely in the 4.75-5.5% range.
The main thing that drove these interest rate increases was inflation. As of now, inflation is starting to cool off which indicates rates should start going down as well. Most experts right now believe rates have peaked. They are also predicting mortgage rates will come down by about 0.5-1% by the end of this year
But the most important thing to note is, when rates move lower – buyer competition goes up. There are tons of buyers just waiting for the news that rates are going down before jumping back into the market. And I understand the appeal of waiting because a lower interest rate saves you money by lowering your payment. But here’s the thing, if the majority of people are waiting for rates to go down. What will happen when rates go down and all these people then enter the market to buy a home? More buyers in the market means more bidding wars and more bidding wars means higher prices. I’m sure you’re like most people and would rather have the ability to negotiate a lower price instead of getting caught in another bidding war.
The Cost Of Interest Rate Increases
Let’s review as of July 2023 the exact cost of increased interest rates over the last 12 months. I’m going to compare the math on a median-priced home in 2022 when prices peaked to where they are now –
At 20% down on a $445,000 house last year when prices peaked your monthly payment at the 5% interest interest rate was about $2,400.
At 20% down on a $405,000 house right now – because prices have dropped and bottomed out in January of this year, they’ve gone up since then – your monthly payment at the current 6.75% interest rate is about – $2,500.
So rates are higher but prices have dropped so things effectively even out. This is so important because when we look at the actual numbers and break them down, you can see things really haven’t changed too much for your monthly payment and that’s all that really matters – your monthly payment. Far too many people are obsessed with the rate and completely overlook the monthly payment. The rate is just a piece of the equation but the monthly payment is the most important part.
Most importantly – none of us can control when rates will eventually come back down but we can control getting a lower rate right now if needed.
How To Get A Lower Rate When You Buy
So here’s a mortgage trick to get a lower payment that’s awesome and very common right now, it’s called a buydown. The most common buydown programs are the 3-2-1 and 2-1. The numbers indicate how much it drops the rate. So for a 3-2-1, it’s dropping your rate 3% the first year, 2% the second year, and 1% the third year. For a 2-1 it’s dropping your rate 2% the first year and 1% the second year. In this market right now it’s simply a stopgap until rates go back down which is the overwhelming consensus among everyone – within the next 2-3 years rates will get back down into the 5s. Here’s exactly how it works –
Let’s say you are buying a home that’s worth $400,000 and you want to ask for a $10,000 price reduction. Dropping the price to $390,000 would only lower your monthly payment by $60 per month. Not what most expect.
But, if you leave the price at $400,000 and take that same $10,000 and use it as a seller credit to do a 2-1 buydown you would save $476 per month in year one and $244 per month in year two.
This is huge because it gets you through the first couple of years with a lower payment. It goes so much further than the usual price reduction most buyers ask for.
Here are a couple more examples for a $750,000 house from my escrow app calculator…
At a straight 20% down Conventional loan with no interest rate buydown of any type, your monthly payment would be about $4,700 per month.
But on a 2-1 buydown you will save $762 per month for the first year and $400 per month for the second year. It costs about $14,000 upfront.
And even better on a 3-2-1 you will save $1,110 per month the first year, $800 per month the second year, and $400 per month the third year. It costs $27,000 upfront.
Now this does vary by a number of factors for every buyer. This is just a straight estimate based on the current trends. Rates, terms, programs, and guidelines do change. I bring this up solely because it’s an option my clients are using right now but most buyers in the market don’t know of it. Your lender can get you more detailed specifics.
How Homeowners Can Beat Higher Interest Rates
Now here’s a way every current homeowner can offset these rates when buying their next home. Most homeowners have a tremendous amount of money in their house, you can use your current house to fund your next purchase and dramatically lower your payment. Here’s a client example, it’s a little complicated.
My client bought their first house in June 2019 for $285,000 at 10% down. When they sold last year that house was worth $450,000. That’s $165,000 in earned wealth. Combined with their down payment that’s $193,500 for their next house. Now here’s where it gets good –
Last year they went to buy another home in a different area for $500,000. With the higher 6.25% rate and 10% down their payment would be $3,400. But it was actually nowhere near that because their down payment wasn’t 10%, it was actually 38%. Their true payment was $2,400.
So their previous house is funding their next house by rolling all that money into it. Their payment dropped 30%. See most payments current homeowners are quoted for don’t include the massive amount of equity they have in their current home.
Homeowners right now in Vegas are sitting on a record amount of wealth. Look at this equity you have as an antidote to higher rates. The last three years alone, even with recent price drops, will finance your next house and get you a lower payment. This also doesn’t include potential programs like those buydowns which can save you hundreds more.
And when rates eventually drop back down you have two scenarios – you have the ability to refinance and pocket those savings or refinance but keep paying the same amount you’ve been paying and pay your house off way faster.
Lastly, many people feel stuck in their current house because the rate is so low, but what if you’re in a house you hate just because of a low rate? The way I see it is there are two types of homeowners in this market right now. Those that have outgrown their house and no longer enjoy it, but feel stuck in it just because they have a low rate. And then there are those that have outgrown their current home, but appreciate the savings the lower rate gave them when owning it and are ready to cash out and move on. I’m sure you’re like me and would rather pay more for something that fits you perfectly and brings you enjoyment every day instead of settling for something you hate just to save some money.
So we’ve addressed the biggest elephant in the room right now in real estate – interest rates. I hope at a minimum this data has opened your mind to how many options there are right now. Things aren’t nearly as bad as most make it out to be. These rates will not last forever, it is a temporary issue and as we’ve reviewed there are multiple options to help.