keeping real estate simple

As interest rates continue to rise, prospective homebuyers feel like the rate hikes have priced them out of a purchase, while leaving sellers out there watching the days on market numbers increasing for home sales, causing them to have to lower their prices in order to get their home sold.

While it might feel hopeless right now, there is a way for both sides to win in this market!

First, let’s talk about the buyer side. And the 2/1 buydown programs from lending institutions that are becoming more and more popular. In short, this is a way to buydown the rate for the first 2 years of the loan so that the payment is more comfortable, knowing that you can refinance later to what should be a better rate when things settle down.

*The 2/1 buydown isn’t the only program out there that can help, but I want to talk about it as it is very popular right now.

How it works in simple numbers on a $400,000 purchase (not including taxes, insurance, etc. just the loan cost).

First, let’s look at what a typical 30-year fixed rate would be at today’s rate of 7.91%:

Purchase price- $400,000              

Interest Rate- 7.91%

Monthly payment- $2,910

2 years of payments =$69,840

Year 1 of 2/1 buydown                                                  Year 2 of 2/1 buydown

Purchase price- $400,000                                               Purchase price -$400,000

Interest Rate- 5.91%                                                        Interest Rate- 6.91%

Monthly payment- $2,375                                            Monthly payment- $2,637

1 year of payments= $28,500                                      1 year of payments= $31,644

2 years of 2/1 buydown payments equals $60,144, a savings of $9,696 over the 2 years compared to a traditional 30-year fixed mortgage.

Now, you are probably asking, “what happens after the 2 years is up if you don’t refinance before?” Whatever the prevailing rate is at the time the loan was taken out, in this example, 7.91% would be the 30-year fixed rate from that point on. However, most of the lenders offering this program, give you a free refinance should the rates drop within this period so you can get a better rate. So, you either win big by saving the $9,696 upfront and get a lower rate later, or you still win by saving the money and then having the lower locked in rate should rates not get any lower during that period. In which case you just wait and refinance when they do fall again.  

Additionally for buyers, in Clay County, Missouri where I am located, the average sales price of houses is down $32,626 from June of 2022 to October of 2022, and that price trend is likely to continue downward in November and December. As rates go up, the house prices must come down as an offset. Even this rate buydown cannot erase that from being necessarily. And yet another win for buyers…the rates have driven many buyers from the market, so buyers that enter now will be running into less multiple offer situations and having to pay well above list price, waiving inspections, appraisals, etc. as they were having to do over the past few years to win the house. Basically, the market has become more buyer friendly of late. So now is the time to jump back in if you have been waiting on the sidelines.

But wait! You said there is a way for both sides to win. What about sellers? How are falling prices and less buyers in the market a win for them? Glad you asked. While there is nothing generally good about having the average sales price be $32,000 lower over the past few months, there is some good here. For one, if you sell your house and buy another, you get to enjoy all the benefits outlined above for buyers. So if that is you, there is that.

But if you are just selling, what about that? A couple of things. For one, I know there were lots of sellers over the past few years that while they loved the big numbers in offers, they hated having to vacate their house for the endless number of showings that take place while on the market. Having hundreds of people going through your house can be stressful. Many of which may not be serious buyers. However, in the current market, the buyers that are still out there are serious. It’s now a quality over quantity thing.

Having said that, supply vs demand is still in your favor. While houses are not selling as fast as they had been before, that doesn’t mean there isn’t a need for more listings, because there is. The buyer pool still out numbers listings, and it will continue to for some time. While buyer-friendlier now, it is still a seller’s market. You can still get a really good number for your house, given that the year over year value of your house is still going up. So, it is still a winning play to sell your house.

In the end, while the rate hikes seem like doom and gloom, you also have to remember that even 7.91% is a historically low rate in the grand scheme of things. I know that is hard to believe when we have been conditioned to see numbers in the 3’s and even 2’s for a bit. But it’s true. Sometimes you just have to dig into the numbers a bit more to see how making a move now can be a good thing.