How to get a reduced mortgage rate in today’s market?

It’s no secret that mortgage rates have gone up a bunch. We went above the 8% mark and are now in the mid-sevens.

With the increase in home prices combined with these interest rates, it’s pushing many people to throw their arms up and just say, ‘nevermind, this just isn't for me.’

But I want to encourage you out of that way of thinking and offer you some creative ways can get into a home today while demand is still low.

So let’s get to it.

The first way you can leverage the market to your advantage is by getting the sellers to pay for an interest-rate buy-down for you.

What is an interest rate buy-down?

Here’s how this works.

When you start the process with a lender to find out how much of a home you can afford, that will be based on the interest rate that you qualify for at the time. Today, a lender might tell you that you can get a loan of up to $250,000 at an 7.5% interest rate.

So that’s your max budget. If you’re putting 10% down, then that would mean you’re shopping for a house up to $277,777.

You find the home for that price. If you bought that home with no buydown, then your monthly principal and interest payment for that $250,000 loan at 7.5% would be $1,748.

Then you have a Realtor, like me, negotiate a 2-1 rate buy-down for you. The sellers agree to this and that saves you $328.66/month in year one of your mortgage and then $167.93/month in year two of your mortgage.

Your savings over the first two years of that loan will total $5,959.07.

The way this works is the sellers pay the difference in the interest rate for those first two years so that you’re paying 2 points less for the first year of the mortgage and one point less on the second year of the mortgage.

So since in this example, your $250,000 loan is at an 7.5% interest rate, for the first year of owning the home, as the buyer your mortgage payment is such that your interest rate is only 5.5%.

So you’re actually only paying $1,418.22 for the principal and interest portion of the loan in year one of the mortgage. The seller pays for that $328 monthly difference.

For the second year of owning the home, as the buyer your mortgage payment is such that your interest rate is only 6.5%. So you’re actually only paying $1,578.95 for the principal and interest portion of the loan in year one of the mortgage. And for year two, the seller pays for that $167 monthly difference.

There’s also a 3-2-1 buydown that works the same way but has the interest rate in your first year going down to 3 points below. So year one you’d be paying at an effective mortgage rate of 4.5% which would put your principal and interest payment at $1,265.48 per month.

That's a pretty good deal.

Now the cost to the seller almost doubles with a 3-2-1 buydown. It was previously a total expense of $5,959.07 with a 2-1 buydown but the 3-2-1 buydown turns it to being $11,735.85 out-of-pocket for the seller.

And before you count on a 3-2-1 buydown, you’ll want to be sure this amount of a credit is allowed by your lender. So, again, back to me reminding you to go into this with a great lender who knows how to do this.

Here are the frequently asked questions with an interest rate buy-down:

Why would you buy down the interest rate?

This is a great way to get into a home now at today’s prices and temporarily reduce your monthly cost of homeownership. It can help you free up cash to add to your savings or a contingency fund to further create a financial cushion for yourself.

How do I make sure the seller pays for this every month?

That is a huge benefit of this program - the seller pays for this subsidy in one lump sum at closing. So you don’t have to go back to the seller to get this monthly payment or worry that the seller might miss a payment.

This gets collected upfront at the time of closing. The funds are put into an escrow account and disbursed for you. The buy-down is all administered for you behind the scenes so you don’t have to do anything but pay what’s on your mortgage statement.

You need to make sure you’re working with a lender who can set this up because there’s special documentation that has to be set up and signed at closing to make sure the funds are allocated appropriately.

Why can’t I increase my budget if the sellers are paying to buy my mortgage down?

This buy-down is temporary and will revert back to the original interest rate after the term. So you still have to qualify for the loan today at the current rate.

Just because your monthly debt-to-income ratio will be temporarily lightened due to the lower monthly payments, the lender wants to make sure you qualify at the original terms so there aren’t any surprises when the mortgage goes back to the full percentage to be due from you.

Can you refinance a buydown loan if rates go down?

Yes. If you refinance the loan during the term of the rate buy-down, the seller credits that would’ve gone to the loan will get refunded back to you. So you don’t lose those credits and you aren’t locked into the loan for the entire term. It’s a win-win.

Should you buy down your own interest rate?

This isn’t something you would typically do for yourself because you’re not saving yourself any money by doing this on your own. You'd essentially be paying the money now instead of having it spread out over time. Where this comes into your advantage is if you can get the seller to pay for this.

And sellers are paying for it!

In our MLS, there are 740 listings that are offering some sort of rate buy-down. That’s before they’ve even been asked to provide it. Consider the fact that in October 2023 for our MLS, sellers negotiated an average of 4.7% off the original price of their home to sell. The average sales price on a home was $456,132. The math says sellers are willing to negotiate about $22,000. That’s more than enough for a 2-1 rate buydown on most homes and you’d still have money left over for some closing costs.

If you want a copy of that exclusive list, I can get that to you. Just go to crazyrealestatemarket.com and you’ll see a bright yellow box with a form to let us know where to send that list. And if you tell us a little about the house you’re looking for and the areas where you’re looking to buy, we can tailor the list to fit your search criteria.

So, here’s a quick recap…

The pros and cons of buying down the interest rate:

Pros:

The seller pays for it upfront.

It’s administered for you so it’s a set-it-and-forget-it system.

They can help you pad your savings in the short term.

Cons:
It doesn’t increase your budget since you still have to qualify at today's interest rate.

When the buy-down expires, the new payments could come as a surprise.

Not all lenders offer it, so be sure you’re working with a lender who can facilitate a buy-down. And I know a few... so feel free to reach out if you'd like an introduction.

Alright. Now you’re an expert on Mortgage Rate Buy-Downs.

So on to the second way you can buy a home today at below-market interest rates.

And that’s by buying new construction spec homes.

Yes, you can get a really good deal right now on a brand-new home.

Builders are heavily incentivizing their spec homes right now. I’m recording this video towards the end of 2023 and Q4 tends to be a really good time to buy builder spec homes in general. But this year there are some additional advantages.

First, just like any other year, builders want to get things off the books before the end of the year. They don’t like to carry liabilities over to the new year and prefer to close out any finished inventory ASAP.

This year there’s a little more in it for buyers because builder confidence is back down for the third month in a row, based on the NAHB/Wells Fargo Housing Market Index. Builders are highly reactionary and now is the time to take advantage of the negative outlook and end of year timing.

A lot of builders are offering extremely reduced interest rates to lure buyers in. It’s working. The Mortgage Bankers Association is consistently reporting that new home purchases have had eight consecutive months of annual gains. And at the same time, mortgage applications in the general market are seeing drastic declines.

I have seen some builders go as much as 10% off the list price of a home to get it sold. So not only could you get a great price but you could also use the credits a builder is willing to give to buy down your interest rate too. So you get a double benefit by getting a lower price and a reduced interest rate.

Now be careful with this. Many of these introductory rates are just that, introductory. Meaning they’re going to change at some point during the term. Rarely are these permanent rate buy-downs.

So be sure to ask the builder’s lender about this. And however they respond, ask them to show you were it says in the documentation that this is a temporary or a permanent rate.

I promise you don’t want any surprises in this!

And finally for the third way buyers are able to get below market interest rates is by finding homes for sale that have an assumable mortgage.

Right now there are 105 homes listed on our MLS promoting an assumable rate. And that’s just for the sellers who even know it’s a possibility. There are plenty who don’t know.

I’m actually in the process of selling my home right now and I called my mortgage company to see if my loan is assumable. The first person on the call said it was and transferred me to the division that handles the assumption process. After doing a little more digging into the type of loan I have, it turns out my loan is only assumable by a family member. So that’s unfortunately not going to help me in the sale of my home.

By the way, I had to wait on hold for over an hour to find out my mortgage wasn’t openly assumable. I asked about the wait time and they said they have been inundated with calls on assumable mortgages lately.

Let’s start with the basics.

What is an assumable mortgage?

An assumable mortgage is an existing mortgage that can be taken over by a buyer who then becomes responsible for the remaining payments. So if you’re looking to buy a house where the seller has a 3.5% interest rate that’s assumable, you could take over that existing mortgage and maintain that payment as-is. Not a bad deal, right?

Well, there’s a little more to it. Keep tracking with me.

So the next question - Can you assume a mortgage?

That depends if the seller’s current lender will allow it. The original loan structure has to allow for it and that’s something the seller can find out by contacting the mortgage lender or by looking at their loan documents. This is something only the seller can find out. A mortgage company won’t release this information to anyone who isn’t the mortgagor.

What mortgages are not assumable?

Mortgages that have a due-on-sale clause are not assumable. Conventional loans are not assumable although some exceptions can be made for the instance of transferring the mortgage to a family member.

What mortgages are assumable?

FHA loans, VA loans and USDA loans are typically assumable.

How do I know if my loan is an assumable loan?

You’ll have to contact your lender to find out or read your loan documents. And if you’ve ever tried to read your loan documents… well, I'll save you the headache and you just might want to go ahead and call your lender to find out.

Even if you do have a mortgage that is assumable, you have to be up-to-date on your payments and in good standing with your mortgage company for them to allow another buyer to assume the mortgage.

How does an assumable mortgage work?

So, hurrah! The seller finds out the loan is assumable and they’re up-to-date on their mortgage payments. Then the buyer must get approved through the original lender.

That means going through the entire approval process where the lender will review the buyer’s credit score, credit history, income, and debt-to-income ratio. The new buyer will have to get completely underwritten by the new lender to be able to take over the loan.

But here’s a big catch in this whole assumption scenario, it’s quite likely there’s a gap between what the seller owes on the mortgage and what the seller is currently selling the house for.

Let’s say the seller owes $200,000 on the mortgage but is selling the home for $300,000. Well, somehow that $100,000 gap needs to be paid by the buyer. That can be in the form of cash or it can be in the form of a second mortgage on the home.

And this is where it can start to get a little hairy. If a buyer is now putting a second mortgage on the home, that could affect the buyer’s debt to income ratio and now make it so that they no longer qualify for the loan assumption.

And that new loan you’re getting, well that’s going to be at today’s interest rate, not the interest rate you’re assuming. So while it’s better to pay the higher interest rate on a smaller portion of money, it’s still something to factor into your costs.

How long does it take to assume a loan?

Timing varies based on loan type and the lender’s capacity to take it on, but most estimates suggest preparing yourself for the assumption process to take 60-120 days. Yes. That’s two to four months. So this is not for someone who needs to move quickly.

How much does it cost to assume a loan?

The cost will vary by lender and you should ask this question at the start so there are no surprises down the road. There will be a loan assumption fee and that generally ranges from .5% to 1% of the loan amount.

If you have to take out a second loan to cover the gap from the existing mortgage to the actual sales price of the home, then you will likely have additional fees and closing costs associated with that loan. So be sure to ask for all of these expenses at the beginning of the process so you go in well aware of what your financial outlay will be.

As you can see, it’s not impossible right now to buy a home. To win in this market, you have to think outside the box.

And if you’re hearing all of this and feel it’s a little much and that you’ll just wait for rates to go down or for the pricing of houses to go back down, that may not be the best option.

We have so much pent-up buyer demand that has been going on for years now. During the market runup during Covid, buyers started to sit it out because they didn’t want to compete with all the multiple offers and they grew weary after making so many offers and losing.

Then the group of sidelined buyers grew bigger when interest rates started increasing. They started saying, “When interest rates get back in the 5’s, I’ll jump back into the market then.”

But they never went back in the fives. They went into the sevens and then more people said, “nah. I’ll wait until rates go back into the sixes.”

But they haven’t gone back into the sixes. So the group of sidelined buyers has only gotten bigger.

So one theory of what will eventually happen is this now enormous group of sidelined buyers will start to just accept current rates as the new normal and will start to slowly creep back into the market and the size of that sidelined group will slowly recede.

The second theory is that if rates go down, you’ll have a bunch that will jump in and crowd the market. That will push us back to the uber-competitive buyer market we just came out of where prices went up and you had to offer a lot over the asking price to win the bidding war.

Or, you could forget playing the game of trying to perfectly time the market and you could operate in a much more calm purchase environment as a buyer where you have the leverage, use one of these three methods to get a house today at a below-market interest rate, and lock in the price of the house while getting the peace of mind of having a home now at today’s price.

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If you have any real estate plans for the next 12-24 months, let’s schedule a no-obligation strategy session to explore the opportunities of buying or selling in today’s market. You might be surprised at some of the opportunities available.