US Mortgage rates are now at levels not experienced for over two decades as the era of ultra-cheap money has ended globally. Savers are being rewarded with much higher returns on their saved dollars. In China, higher rates were mostly aimed at cutting back over-borrowing and over-building, but the US has not been over-building and the issue that seems to be a bigger threat to home prices is under-supply, not cheap money.
While the authorities figure this out (and chances are they will be slow and mess things up quite a bit before enacting policies that really work) what are people to do? A home is not a fancy watch, it's an essential. Shelter is the one thing we all need, not just want. Higher rates may reduce the number of investor-buyers which could be helpful. They swallowed up huge swaths of (mostly more affordable) homes thereby reducing supply and inevitably pushing those prices up. They also raised rents. There are some signs of over-building of rentals in areas, but long-term it's likely this will be absorbed relatively quickly.
What are some things buyers can consider to adapt to higher interest rates?
1. Shop around for the best rates. Yes, not all banks are offering the exact same rates. Some are better than others and with fewer mortgages being issued, there is more competition in this area.
2. Improve your credit score which could impact the rate. While bad credit is one thing, even those with good credit can elevate their scores with specific, targeted actions. There are consultants specialized in this.
3. Lower your budget. Instead of buying that $1 million home, look at those selling for less to see if they may work.
4. Focus on the monthly payments. What are the HOA fees? Real estate taxes? Operational costs? Insurance? Sometimes a higher priced property costs less to service financially than a lesser priced property.
5. Seek out properties where the asking price may be more negotiable. Some sellers are more negotiable than others. Some have reduced prices. While most seek a windfall, others are being more pragmatic.
6. Increase your down payment if you can. Are you getting 6.5% for your cash? That money offsetting a borrowing cost of 6.5% may be wiser.
7. Timing the markets is usually unreliable. When rates come down you can always re-finance, but chances are when that happens home prices will go up as more buyers usually enter the markets.
8. Adjust your living budgets. Could you cut something from your overall living budget to add more money to service a mortgage?
9. Place offers. You never know. We are in times of uncertainty and some sellers who have owned their homes for a long time don't have the same cost basis as those who bought in the past 3 years.
Most people sell after 10 years of ownership. Pricing in 2013 was a lot lower!
10. Ask for owner financing. Sellers with more equity could see value in doing this. Seller financing can be used to avoid taxes in some circumstances, eg: if the seller finances a portion of the purchase price and then structures the loan as an interest-only loan, they may be able to avoid capital gains tax on that portion of the sale.
11. Take a closer look at fixer-uppers. Most pay a huge premium for a move-in brand new home. Yes, it's easier and quicker. But sometimes doing the work yourself creates value at time of purchase. That always has long term value.
12. Even in times of uncertainty every month you pay rent is a month less of equity building and a lost tax deduction. Rents can come down, but over time are very closely tied to inflation. If inflation averages 2% over the next decade, a $4,000 rent payment today may be $4,875/ month 10 years from now.
A professional, informed and insightful agent with real-time information is invaluable in this process.
