Navigating Rising Interest Rates

Hot on the heals of the COVID-19 crisis and the subsequent economic impact payments, the real estate market went into an unparalleled frenzy. Record low interest rates, record low inventory, and a massive market of buyers who decided that now was the time to move drove home prices into the stratosphere. It became normal that new listings would see showings number in the 100s, offers number in the 20s, and offer prices $25k to $50k over list price with appraisal waivers. And we knew it couldn’t last long.

What goes up must come down after all. Inflation was and still is out of hand… so the Fed does what the Fed does – they raised the federal funds rate to try to stem the tide. And they didn’t just raise it once… so far in 2022, they’ve raised it five times from .25% to now 3.25%, and there are still two Fed meetings left in the year.

The federal funds rate is not directly tied to mortgage rates, but historically, when one goes up, the other is not far behind. Which is why 30 year mortgage rates have gone from roughly 3% in January, to nearly 7% today.

We’ve spent the last decade enjoying extremely favorable rates, and for those experienced real estate savants, we’ve just forgotten what a normal market is. New homebuyers and sellers have never known anything different. And that’s created a whole new set of challenges for both homebuyers and homesellers. But fret not… we’ve got some compelling ideas to help both buyers and sellers with navigating rising interest rates.

Bring terms back to the table

“Terms” include all the negotiable aspects of a real estate transaction. These might include price, down payment, earnest money, option fees, repairs, occupancy and closing costs. Ever since the market exploded, sellers and their agents have been negotiating appraisal waivers, inspections, and shifting many of the costs involved in selling a home to the buyer. For sellers it was a VERY favorable time.

Rising interest rates have balanced the tables. Inventory is growing and rising interest rates are decimating affordability. The number of days that homes are staying on the market is growing and we’re actually starting to see price reductions again. Negotiations on terms and around interest rates are back in fashion.

Consider an interest rate lock program

Most lenders offer rate lock programs that will allow you lock in your mortgage rate for up to 45 days even before finding and contracting your next home. With almost assuredly more rate hikes coming in the next couple of months, locking in your rate, even at today’s seemingly high rates, is one way of navigating rising interest rates.

Some of these programs even offer a “float down” option that will automatically lower your rate should rates go down. Depending on the length of your rate lock, fees may be involved, but compared to the potential savings from a lower rate, those fees often pay for themselves many times over.

Learn what your new budget is

If your home loan pre-approval was obtained before rates started their upwards hike, you may not realize that those increasing rates have reduced the amount of the loan that you now qualify for.

For example if you qualified for a $300,000 loan at 3%, your monthly principle and interest payment would be roughly $1,265. If that rate were suddenly to double to 6%, your monthly payment jumps to $1,799… for the same loan amount! So in order to keep your monthly payment at that lower price, the total amount of your mortgage goes down… to $210,000. This is what we mean by rate affecting affordability.

This is why it’s imperative that you stay in constant contact with your lender to keep your approved loan amount in the crosshairs. If the rate goes up, the loan amount goes down and you’ll have to come up with some creative ways to balance the two.

Get Moving, aka marry the house, date the rate

If you know any agents or loan officers, you’ve probably seen this phrase ad nauseam (we all have a nasty habit of repeating these little colloquialisms). But what it all comes down to is to Get Moving. Get off the pot. Just do it. You get the idea. There’s an ancient Chinese proverb that says, “the best time to plant a tree was 20 years ago. the second best time is now.” And there’s wisdom in that.

It relates to navigating rising interest rates with real estate as well. In the kind of inflationary times that we find ourselves in now, we can only expect that rates will continue to climb, and affordability will continue to plummet. So buy the house now before rates go up again. You can always refinance when rates stabilize. The price of homes rarely go down, and when they do it’s not for long.

Bring the rate into negotiations

Now that the market is shifting, it’s not uncommon to see price reductions, or cash concessions from sellers to buyers as part of bringing the deal together. For buyers, cash concessions were always a way to minimize the amount of money that they had to bring to closing to buy the home. That’s why lenders ultimately cap the amount of money that a seller can contribute towards the buyer’s costs because they want the buyer to ‘have skin in the game’.

But what if instead of contributing cash towards the buyers closing costs, the seller instead offered to buy down the buyers rate. In other words, instead of asking sellers to contribute $10,000 towards the buyers closing costs, they used that same $10,000 to buy down the rate from 6% to 4%. It would raise the buyers affordability level, and the savings that the buyer realized over the life of the loan would FAR exceed that of the $10,000 they didn’t take at the closing table.

And this is a win for sellers too. It has the potential to bring in a whole new pool of potential homebuyers. To use our example from above, what if a seller had their home listed at $300,000? Offering to buy down a buyers rate from 6% to 3% suddenly brings in those buyers that are only approved for $210,000. And potentially, the seller could add the cost of buying down that rate onto the sales price of the home.

Is your mortgage assumable?

Homeowners that have purchased their homes over the last 10 years have by and large been able to take advantage of the most favorable mortgage interest rates in history. Today’s buyers don’t have that option. And it may be years before they do again. So sellers have a bargaining chip if their lenders are willing to play ball.

Most mortgages have a due-on-sale clause that makes the balance of their loan due in full should the property ever be sold prior to it being paid off. Some lenders however, are willing to negotiate this particular part of a mortgage. What if you, as the seller, were to contact your lender’s servicing department to try to negotiate the ability to have a buyer assume your mortgage at your existing rate. Do you think that perhaps that would give you huge leverage to attract strong buyers who need a lower rate? You bet it would!

Navigating rising interest rates doesn’t mean the dream of homeownership is out of reach. There are strategies that enable both buyers and sellers to still win, even in this time of turmoil. The key is to find and work with strong agents and lenders that will seek out creative financing solutions.