Just when we were hoping mortgage rates would start heading in the right direction, they took another turn. After hovering in the mid-6% range in September, mortgage rates climbed into the mid-7% range in October, an increase of approximately one percentage in just a few weeks.
This sudden increase has impacted both buyers and sellers. However, the good news is that there are some creative strategies that can help navigate higher interest rates.
Buyers: Is Now a Good Time to Buy?
While interest rates are higher, waiting for them to come down may not necessarily be the best strategy. There is no guarantee rates will decrease anytime soon, and in fact, they could increase even further.
If you purchase a home today with a fixed-rate mortgage and interest rates continue to rise, you’ve already locked in your rate. However, if rates decrease, you can refinance at a lower rate.
The good news is we are in a buyers’ market, which gives buyers greater negotiating power, not only on the purchase price but also on the terms.
Sometimes negotiating the terms of a purchase can save you considerably more than negotiating the price.
Price Reduction versus Seller Concessions
Let’s say you’re purchasing a home listed at $700,000.
Option A: Negotiate the Price
You offer $679,000, a $21,000 reduction. Assuming a 20% down payment, a 30-year conventional mortgage, and a 7.25% interest rate, your monthly principal and interest payment would decrease by approximately $121.
Option B: Ask for Seller Concessions
Instead of reducing the price, you offer the full $700,000 but ask the seller to contribute $21,000 toward your closing costs and other eligible expenses.
This is called a seller concession, and it can be a powerful negotiating tool.
These funds can help cover closing costs, prepaid expenses, and mortgage rate buydowns, allowing buyers to keep more money in their pockets.
A Rate Buydown?
What is a mortgage rate buydown? A permanent rate buydown allows buyers to pay an upfront fee, called discount points, to secure a lower interest rate for the life of the loan.
As a general guideline, one discount point costs 1% of the loan amount and may reduce the interest rate by approximately 0.25%, although the actual reduction varies.
For example, on a $560,000 mortgage, one point would cost $5,600. If that reduced your rate from 7.25% to 7%, you could save approximately $103 per month on principal and interest.
When you negotiate sellers’ concessions, these funds may be used to buy down your rate, so the seller is paying for your rate buydown.
Temporary Rate Buydowns: Another Great Option
Some lenders are currently offering promotional one-year temporary rate buydowns at no cost to buyers or sellers. However, check with your lender, as some may offset the cost with a slightly higher interest rate. While Realtors cannot provide mortgage advice, we can connect you with trusted lenders offering these programs.
With a 1-0 buydown at NO COST to the buyer or seller – If your mortgage rate is 7.25%, your payment would be calculated at:
Year 1: 6.25%. Year 2 onward: 7.25%
This can provide significant savings during that first year of approximately $372 a month.
With a 2-1 temporary rate buydown – This does come with an upfront cost, but the good news is that you can negotiate for the seller to cover some or all of this expense through seller concessions, potentially saving you thousands of dollars during the first two years of your mortgage.
Using the same 7.25% mortgage rate:
Year 1: 5.25%. Year 2: 6.25%. Year 3 onward: 7.25%
Saving approximately $728 a month for the first year and $372 a month in the second year.
This allows buyers to ease into their mortgage payments while freeing up money for furnishings, improvements, or those unexpected expenses that come with homeownership.
Remember, these reductions are temporary. Buyers must qualify and should be comfortable making the final payment even if refinancing never becomes an option.
Sellers: Get Creative Instead of Just Reducing Your Price
When the market becomes more challenging, sellers need to think differently.
Reducing your asking price by $5,000 or $10,000 may not make much difference to a buyer’s monthly mortgage payment. However, offering that same amount toward closing costs or a rate buydown could be considerably more attractive.
A buyer struggling with upfront closing expenses may find a $10,000 concession far more beneficial than a $10,000 price reduction.
Offering concessions may help attract more buyers.
Knowing how to negotiate can make all the difference!
Whether you’re buying or selling, understanding your options in today’s market is key. If you have any questions or would like to explore the best strategies for your situation, please don’t hesitate to reach out. I’m always happy to help!