OUCH!!! Conventional mortgage rates increased to 6.8% last week after the Fed announced another rate hike, and they are predicted to stay at these levels, or increase as the year progresses. Jerome Powel, Chair of the Fed, warned that the housing market needs a correction, and that his policies are aimed at getting inventory to increase and prices to cool.
While this may be welcome news to future buyers – if you are currently in the market to buy (or sell) a home the situation is painful. However, there are ways to ease the burden of high interest rates. Mortgage discount points offer buyers a mechanism to lower interest rates for the term of a loan. Mortgage points are purchased from a lender at closing, and essentially allow buyers to prepay the interest on a loan to reduce the rate. One point costs 1% of the loan amount, and the amount the interest rate is lowered varies. Points are not part of a down payment, and therefore do not increase equity in the home. Points increase the upfront costs of buying a home.
Many buyers do not have additional funds to spend on points. When we work with clients, we recommend these buyers ask for seller concessions, rather than negotiate the price. If the seller agrees to provide funds for mortgage points in lieu of lowering the price, the buyer will save more on his monthly payments. A lower interest rate will offer bigger savings than a lower sale price. For example, a 3% seller credit on a $700,000 purchase with 20% down will allow the buyer to decrease his mortgage rate from 6.875% to 5.5% and save $500 per month in a monthly mortgage payment. If instead the buyer asked for a 3% reduction in price with no reduction in an interest rate, he would only save $111 each month.
High interest rates affect sellers, too. Buyers are reluctant to enter the market and can afford less. Sellers can make their homes more attractive by marketing a willingness to entertain seller concessions and/or pay for points to lower the interest rate for buyers interested in their home. A smart buyer’s agent will recognize the value of a concession, and the seller may be able to get a higher price for their home by helping buyers decrease their mortgage rate.
If you are interested in learning about strategic ways to navigate this market, let’s set up a time to meet. We offer our clients a team of experts who work together to devise the best plan to achieve your goals. Our boutique agency includes knowledgeable and experienced agents, a mortgage boutique and title services to ensure you get the best service and guidance.