Alternatives to Sky-High Mortgage Rates
Current mortgage rate environment got you down? Thankfully, there is more than one option when it comes to financing your dream home. With some would-be homebuyers feeling a little shell-shocked by the recent rise in interest rates, let’s explore some alternative financing solutions.
BUT FIRST, A LITTLE CONTEXT
Current rates are more than double their all-time low of 2.65% (reached in January 2021). But if we take a step back and look at rates over the long term, today’s rates are still below the historic average. According to data from Freddie Mac, between April 1971 and June 2023, 30-year fixed-rate mortgages averaged 7.74%. So although the current rate environment is really not all that bad, there are some alternatives you may wish to consider before securing your loan.
RATE BUYDOWN / BUYING POINTS
It may come as a surprise, but some sellers (including builders) are willing to pitch in to reduce a buyer’s interest rate. The seller contributes a portion of their sale proceeds in the form of a “concession” that is paid to the lender to reduce the buyer’s interest rate. The rate reduction can last for the life of the loan, or it can be structured to give rate relief for the first few years. In the event the seller is unwilling to offer a concession, a buyer still has the option to reduce their rate by paying the lender a fee called discount points. A knowledgable lender should be able to provide these rate reduction options.
Photo credit: @precondo
ASSUME THE SELLER’S MORTGAGE
Did you know that according to a recent study by Redfin, 82.4% of homeowners have a mortgage rate below 5% and almost 23.5% have a rate below 3%? How nice would it be to take over their mortgage payments and take advantage of those low rates? Loan assumptions aren’t allowed on all mortgage types, but government-backed loans like VA, USDA, and FHA do allow them. To take advantage of this strategy, you’ll likely also need to have plenty of cash available in order to bridge the gap between the purchase price and the current outstanding mortgage balance.
Photo credit: @leekos
CONSIDER SELLER FINANCING
There are a lot of homeowners out there who either own their properties outright or have a substantial amount of equity built up. A seller financing agreement functions along similar lines as a mortgage loan, except that it cuts out the middleman and allows the home seller to own and oversee the debt instead of a traditional lender. In addition to a potentially lower interest rate, this arrangement typically also offers more flexible agreement terms and lower expenses associated with closing costs.
Photo credit: @homajab
EXPLORE DIFFERENT FUNDING METHODS AND LOAN TYPES
Does it make sense to put down a larger down payment? Doing so means less risk to the lender and typically equates to a lower interest rate. Does it make sense to consider an adjustable rate mortgage (ARM)? ARMs offer much lower rates initially, with higher rates in later years. For homebuyers who will only stay in the home for a few years, this may be an option. Sometimes it’s important to think outside the box of the traditional 20% down 30-year fixed loan. Be honest with your lender about your intent and be open to other mortgage loan options.
Photo credit: @tierramallorca
SHOP THE RATE WITH MULTIPLE LENDERS
This is such a huge, but often overlooked, step in the financing process. Buying a home is one of the biggest financial purchases many individuals will ever make. Small differences in rates and fees can have a tremendous impact on your bottom line. Different lenders have different loan options, fees, and rates. It is always a good idea to speak with more than one lender before making a decision.
Carrie Rowland is an Accredited Buyer’s Representative,® Certified Probate Real Estate Specialist,® Military Relocation Professional,® Graduate of the Realtor Institute® and a Realtor-Associate at RE/MAX Alliance Group in South Tampa
