One of the most significant changes that our team at Mortgage Maestro Group has been tracking over the last 3-6 months has been rising interest rates. In recent blogs, we have covered some of the reasons that swing is happening, including a downturn in financial markets and a cooling off from the red-hot housing market we saw during the pandemic.
As a result, we are getting asked more and more questions about how homebuyers can adapt to rate increases. Here are four ways that you can take advantage of increased rates and avoid common pitfalls.
CASH IS KING
A common strategy recommended to homebuyers when mortgage rates increase is to compensate with higher down payments. If you are able to put more money down initially, this can often reduce your mortgage rate in the face of high averages. A recent report from Redfin confirms that this historic trend is holding with recent rate increases, noting that “The typical U.S. homebuyer who took out a mortgage in July made a $62,500 down payment, up 13.6% from a year earlier and almost twice the median $32,917 down payment in July 2019, before the pandemic.” This spike in average down payments is actually around five percent less than it was during May and June. Since this strategy to compensate for rate increases is well-known, the next question is typically, where do I get extra cash?
WHERE TO LOOK
When it comes to finding extra cash to increase your down payment, one tactic is to liquidate assets. Generally, we advise against using any assets you have allocated for retirement. These funds are harder to recoup in the long run, liquidating them derails compound interest over time, and there are often tax penalties for dipping into these accounts before retirement age. If liquidating assets is something you are considering, our Mortgage Maestro Group professionals are happy to advise you on where to start. Non-retirement investment accounts and assets that do not appreciate over time are a good place to start.
It is important to think about your overall financial picture if you are considering taking out a mortgage loan while interest rates are high. Make sure that you have a full breakdown of all your monthly and annual expenses when you are looking to purchase a home. This budget should look different than it did before inflation, with relevant increases for everyday goods and utility bills.
There are a lot of ways that our experts at Mortgage Maestro Group can help you navigate these market shifts. Negotiating is on the table. Work with an experienced real estate agent who has skills in negotiating deals in a normal market. One example is the opportunity to get the seller to pay concessions to buy down your interest rate. Either temporarily (known as a 2/1 buydown) or permanently. These savings can be impactful in a higher rate market to help the home become more affordable. It is important to keep in mind that while rates have risen significantly in the last six months, we are seeing significant reductions in demand and home pricing. Opportunity is a common factor in any market downturn, and we are here to help you take advantage. Have questions on how to take advantage of a down market? Contact us at 303-779-0591!