Option on How to Navigate In High Interest Housing Market.

Interest rate discussions are all over our social media, the news, or the main topic of conversation with friends and family. Probably you have thought to yourself, “Should I put my dream of buying my first home on the shelf for another day?” Here is the answer: No!  And I will tell you why.

There are different ways you can work through this and look at the situation differently which I want to talk to you about today.

First, you will never know what option you have to help you get into a home unless you speak to an expert on the different options you have available. Talk to a real estate agent and let them know what you are trying to achieve so they can give you the best guidance. Also talk with a loan officer at your bank, someone local or one recommended by your real estate agent. 

If you don’t know anyone please reach out to me at James.Daniel@exprealty and I can connect you with some of the amazing loan officers I work with everyday. 

Now let’s talk about the opportunities you have in this market that may not have been realistic last year.

Less Competition In The Market

There is less competition in the market compared to in 2021. The market in 2021 made it hard for first time home buyers to compete with investors or cash offers. Agents would put their clients house on the market and within hours have multiple offers for a seller to choose from. In this market the interest rate has taken a lot of the competition out of the market whether it was investors, people looking to upgrade from one home to another, those buying vacation homes, and other first time homebuyers that were trying to take advantage of the low interest rates. The less people to compete with the better!

Sellers Are Willing To Help With Lowering Interest Rates

Homes are sitting on the market for longer than they were in 2021 which means sellers are more open to helping anyway they can to get their home sold.  One of the best ways I have seen sellers help is by giving buyers credits to help lower the interest rate on their loan. I just had a conversation with a listing agent yesterday who said they were giving up to $15,000 to help with lowering interest and/or closing cost. 

Temporary Buy Rate Buydown

While helping with the interest rate for the total term of the loan might not move the needle, taking advantage of loan products like the Temporary Buy Rate Buydown may be a good option. It’s a great option for buyers who expect an increase in their income in the next few years or who have excess seller credits to use and want to take advantage of a lower fixed rate. You can also refinance out of the loan if the rates drop before you get to the year where the full rate comes into effect.

Here are the details:

Available For:

• Conventional primary and second home purchases
• FHA and VA primary home purchases

This can be a 1 year or 2 year Buy Down depending on the credits given from the seller.

• 2-1 buydown of 2% in the first year and 1% in the second year. By the third year they are at the full rate.
• 1-0 buydown of 1% in the first year. By the second year they are at the full rate.

See an example of the potential savings on a 2-1 temporary buydown:

More Sellers are willing to help with closing costs

Buying a home requires not only a downpayment but also closing costs. Closing costs include loan origination fee, property tax, title insurance ,etc. Another opportunity in this market may be to have the seller give you credits to help with closing costs. The average closing cost can be 2% – 3% of the home price. For example, a $700k home 2% would be around $14,000. Having a seller help with some of this cost to get in a home could be a great option available in this market that wasn’t being offered in 2021. It also will keep more money in your pocket!

Use An ARM ( Adjustable Rate Mortgage)

An Adjustable Rate Mortgage (ARM) can offer both advantages and disadvantages to borrowers. One of the primary advantages is the initial lower interest rate compared to a conventional fixed-rate mortgage. ARMs typically provide a fixed, often lower, interest rate for an initial period, usually 3, 5, 7, or 10 years. This lower rate can translate into reduced monthly payments, making homeownership more affordable during the initial years. However, the key drawback lies in the “adjustable” nature of ARMs. After the agreed-upon fixed-rate period, the interest rate becomes variable, adjusting periodically according to market conditions. This means that your monthly payments can increase significantly, potentially becoming a financial burden if market interest rates rise substantially. Therefore, borrowers considering ARMs should carefully assess their long-term financial stability and risk tolerance to determine if this mortgage type aligns with their homeownership goals. This loan product could be great when you want to be in a home for less thank the initial period or plan on refinancing out.

Buy Down the Rate With Seller Credits Or Your Own Funds

Paying down points on a mortgage is a strategy where borrowers can lower their interest rate for a more extended period. Points are essentially prepaid interest that borrowers pay upfront in exchange for a reduced interest rate over the life of the loan. Each point typically costs 1% of the total mortgage amount and can result in a 0.25% to 0.50% reduction in the interest rate, depending on the lender and the market conditions. By paying down points, borrowers can secure a lower interest rate, which can lead to significant savings on interest payments over the life of the mortgage. This strategy is especially beneficial for those who plan to stay in their homes for an extended period, as the upfront cost of points can be outweighed by the long-term interest savings.

First Time Home Buyer Programs to help Buying a Home More Affordable

There are also first time home buyer programs available that can help with downpayment and closing costs.  Here are a few with different options that have different requirements that may work for you.

Local First Time Buyer Programs

Your city or state may have specific programs to help its residents become homeowners. Below is a link to some Los Angeles Programs for first time home buyers and with details on what you need in order to qualify. Talk to a real estate agent  in your area for options specific to your city: https://housing2.lacity.org/housing/first-time-homebuyers

State Government Loans

CalHFA

CalHFA FHA Loan Program
The CalHFA FHA Program is an FHA-insured loan featuring a CalHFA 30 year fixed interest rate first mortgage.

CalPLUS FHA Loan Program
The CalPLUS FHA program is an FHA-insured first mortgage with a slightly higher 30 year fixed interest rate than our standard FHA program and is combined with the CalHFA Zero Interest Program (ZIP) for closing costs.

CalHFA VA Loan Program
The CalHFA VA program is a VA-insured loan featuring a CalHFA fixed interest rate first mortgage. This loan is a 30-year fixed interest rate first mortgage.

CalHFA USDA Program
The CalHFA USDA Program is a USDA Guaranteed first mortgage loan program, which can be combined with the MyHome Assistance Program (MyHome). This loan is a 30-year fixed interest rate first mortgage.

Conventional Loans

CalHFA Conventional Loan Program
The CalHFA Conventional program is a first mortgage loan insured through private mortgage insurance on the conventional market. The interest rate on the CalHFA Conventional is fixed throughout the 30-year term.

CalPLUS Conventional Loan Program
The CalPLUS Conventional program is a conventional first mortgage with a slightly higher 30 year fixed interest rate than our standard conventional program and is combined with the CalHFA Zero Interest Program (ZIP) for closing costs.

Down Payment Assistance Programs

The money you put “down” or the down payment on your home loan can be one of the largest hurdles for many first-time homebuyers. That’s why CalHFA offers several options for down payment and closing cost assistance. This type of assistance is often called a second or subordinate loan. CalHFA’s subordinate loans are “silent seconds”, meaning payments on this loan are deferred so you do not have to make a payment on this assistance until your home is sold, refinanced or paid in full. This helps to keep your monthly mortgage payment affordable.

MyHome Assistance Program
CalHFA Government Loans (FHA): MyHome offers a deferred-payment junior loan of an amount up to the lesser of 3.5% of the purchase price or appraised value to assist with down payment and/or closing costs.

CalHFA Conventional Loans: MyHome offers a deferred-payment junior loan of an amount up to the lesser of 3% of the purchase price or appraised value to assist with down payment and/or closing costs.

Focus On Your  Monthly Cost

The last thing I want to mention is to focus on your monthly cost regardless of the current interest rate. Of course, the higher the interest rate the higher the monthly payment but if that cost is the same as your monthly rent (or something you can afford)  buying a home may be something to look into too. If the costs are the same, by buying a home you will be gaining equity compared to not growing any equity at all while you’re renting.You should also add that monthly mortgage estimate to your other monthly expenses to get a better look at your total monthly expenses. Looking at it this way will give you a better idea of what cost of home is within your budget. 

If the number doesn’t work, that’s ok. You have talked to someone and figured out the path you need to take to be ready when the time comes.

If it does work great! If interest rates go higher you will be fine at the current rate you are locked into because the monthly cost worked for you. If the interest rate goes lower you will then be able to refinance at a lower rate. Just remember when looking to refinance I would work with your loan officer to see what the closing cost would be to do so. 

To sum this all up, don’t be afraid of the rising interests and look for the opportunities available that may help you become a first time homeowner. The first step would be to speak to a real estate agent to get an overview of the home buying process. Then or at the same time reach out to a loan officer to see what your are pre-approved for and then if the monthly payment works for you it may be the right time for you to become a homeowner!

If you would like to get started on your real estate journey or have any questions please reach out at James.Daniel@exprealty.com