Tips for Navigating a Real Estate Market With Rising Interest Rates

Oct 21, 2022

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Tips for Navigating a Real Estate Market With Rising Interest Rates

The real estate market has gone through a whirlwind since 2020 when the world shut down. First, we saw a mass exodus from major urban areas as people realized they could work from anywhere. Then, we saw a bidding war as everyone tried to buy a piece of the suburban and rural American dream. Now that mortgage rates are rising again, it's time to take a step back and analyze your options before jumping into the fray.

If you're a first-time homebuyer or someone who isn't frequently checking in with what's happening in the real estate world, the recent newsworthy rising interest rates may shock you. They may even make you second-guess your decision to buy a home at all in 2022. But before you get too worried, remember that interest rates are just one piece of the puzzle when it comes to affording a mortgage, and we're here to help you figure out how to solve that puzzle while considering your financial situation.

With that, we wanted to share a few tips on how to best navigate this challenging real estate market with rising interest rates. Keep reading for more info.

Do Your Research, and Don't Overreact

While it may seem like things are far less affordable today than they were just a year or two ago, there are still plenty of options to choose from regarding securing a mortgage. Do your research on the different types of loans available (we have plenty of great resources right here on our website, and our team is happy to help answer questions), as well as down payment assistance programs that can help you come up with the funds you need for a down payment.

You may be surprised at how many options are out there, and there's no need to overreact to rising interest rates. Rates consistently fluctuate, and they will undoubtedly go down again at some point — it's just a matter of when. If you're looking for financing now, secure the best possible mortgage you can and consider refinancing at a later date when rates become more reasonable.

Get Pre-Approved for a Mortgage Before You Start Shopping

One of the best ways to avoid being caught off-guard by rising interest rates is to get pre-approved for a mortgage before you start shopping for homes. This way, you'll know exactly how much you can afford to spend, and you won't be tempted to overextend yourself financially if you find a property you really love but is slightly out of your budget. Getting pre-approved is simple — reach out to our team, and we'll help get you started.

Ask for Seller Credits

Something that we recommend to many of our clients is to ask for seller credits to cover a 2-1 buydown or to pay closing costs. A 2-1 buydown is where the seller and/or realtors (not the borrower) pay for an interest rate reduction of 2% for the first year and 1% the second year, and then the beginning of the third year, going back to the original rate.

Let's walk you through a short example:

If the par rate today was 6.25%, then a 2-1 buydown would allow you to have a 4.25% interest rate and payment the first year, a 5.25% rate the second year, and back to 6.25% the third year.

In this scenario...

Home purchase = $550,000

Loan Amount = $440,000

Interest Rate = 6.25%

Your base monthly payment would be $2,709.16 under a typical mortgage scenario with standard terms. Under a 2-1 buydown scenario, your first year's monthly payments (at 4.25% interest) would be reduced to just $2,164.54, saving you $554.62 per month, or $6,535.44 over the first year. In the second year, at an interest rate of 5.25%, your monthly payments would be $2,429.70, a savings of $279.46 per month or $3,353.52 for the year.

For the first two years of your mortgage, your 2-1 buydown saves you $9,888.96 (a significant amount), which the seller will give as a credit at closing to be held in an escrow account. The borrower will make their lower monthly payment each month, and the difference will come from the other escrow account. If the client refinances before the 2-year term is up, the remaining funds in the escrow account will go toward the principal.

There are other seller credit options available that we are happy to discuss with you during a consultation. Just let us know what questions you have!

Be Prepared

In a challenging real estate market with rising interest rates, it's more important than ever to be prepared. Follow the tips in this blog post to ensure you're doing everything possible to get the best mortgage for your needs and keep your finances on track. Maggie and the team are here to help — reach out if you have any questions or need advice.

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