5 Surprising Ways Homebuyers Can Outsmart Today’s High Mortgage Rates
Mortgage rates have been on a wild tear recently, reaching 20-year highs topping 7% near the end of last year and bouncing around unpredictably ever since. And since even slight fluctuations in rates end up costing homebuyers hundreds of dollars a month, it’s understandable that many are paralyzed by indecision—should we buy or wait for rates to drop?—or else scrambling for any advice on how to stay ahead of the curve and keep their costs in check.
To help, we’ve compiled a few tactics we’ve heard from real estate experts and homebuyers on how to outsmart the turbulent tides of rising rates.
While some methods might strike some as unconventional, you may find that they’re becoming increasingly common in today’s unpredictable real estate market. If you’re tired of taking a wait-and-see stance or of simply sitting and praying for rates to head south, read on for some clever end runs, along with the pros and cons of these unusual approaches.
1. Mortgage rate buy-downs
Mortgage rate buy-downs have attracted attention ever since rates shot up in mid-2022, and for good reason: They remain one of the easiest ways to make a dent in higher financing costs.
In essence, someone makes an upfront payment to lower the monthly interest rate for the first few years of the loan. That someone may be the seller of the property or the homebuilder if you’re buying new construction, if you’re in a position to request some concessions from either. It can also be you.
One of the most popular products, the 2/1 buy-down, for example, entails an upfront payment to reduce the first year’s interest payments by 2 percentage points and the second year’s interest payments by 1 percentage point. By the third year, the original interest rate kicks in.
But many homebuyers taking on buy-downs expect to watch the mortgage market, hoping for a chance to refinance into a lower rate permanently at some point.
Lenders say it’s critical to do the math on all varieties of buy-downs and see what is most comfortable for you.
One important thing to keep in mind: You need to qualify for the higher monthly payment that will kick in after the buy-downs fade away.
2. Seller financing
Another strategy that’s grabbed attention recently is seller financing. Just as it sounds, this involves a homeowner giving a home loan to the buyer of the property, who then pays the seller back plus interest. The buyer hopefully benefits with a lower interest rate than what a bank offers, while the seller benefits by being paid back at an interest rate that’s likely higher than what a savings account or CD would yield.
This is especially true in situations where the seller doesn’t want to take a lump sum of cash, and all the capital gains implications that may go with it.
Experts caution that it’s critical to make sure all the t’s are crossed and i’s are dotted. Use attorneys to draft the agreement, make sure you know who’s responsible (the buyer or the seller) for paying the property taxes, and be absolutely sure the title to the home is clear.
Even with those precautions, some experts remain wary. Consumer protections, if there are any, tend to be governed by state law, not the federal guidelines that emerged out of the subprime crisis.
What’s more, if you enter into this kind of agreement, you almost certainly will not be able to qualify for many traditional bank products like home equity loans or lines of credit, nor the kinds of homeowner protections that may arise in emergencies, such as the COVID-19-era forbearance programs.
Still, many real estate professionals who work directly with buyers and sellers say it can work.
3. House hacking
Buying a home that may double as an investment property might be counterintuitive if you’ve been struggling to find something affordable, but it’s one of the most tried-and-true approaches to becoming an owner, and it’s seeing a major resurgence today.
Instead of searching for the elusive single-family dream home, for example, you might buy a duplex and rent out half of it. You might buy a property with an accessory dwelling unit and rent that out. Or you may even be able to swing a 3-4 unit building and rent out all of the units you’re not living in.
The most important takeaway for buyers is that you do not need 20% down. Just like with mortgages for single-family homes, you may be able to finance with as little as 3% down.
There are, of course, many considerations. Some lenders and mortgage programs will allow you to apply the rent you expect to receive to your income to qualify for a bigger mortgage, but some will not. Some will allow that income to be considered, but only for long-term rentals, not shorter ones like those on Airbnb. Similarly, some cities and states have very strict requirements about whether and under what circumstances they’ll allow ADUs and short-term rentals.
You must also take into account the time associated with being a landlord—dealing with toilets and tenants, as the saying goes.
But on the flip side, many of the expenses that may come along with homeownership are now business expenses and are therefore tax-deductible.
4. Down payment assistance and first-time buyer programs
Another way to get your foot in the door: tapping one of the nearly 2,000 programs across the country that offer financial help with your down payment. These down payment assistance programs are one of the best-kept secrets to buying a home.
Contrary to what some may believe, you do not have to be a first-time buyer to qualify for assistance—although there are also plenty of resources specifically for first-timers.
These programs may offer down payment assistance, first-time buyer assistance, closing cost help, and so on. You might need to meet residency requirements, or buy only in certain geographic areas, or occupy the home as your primary residence for a certain period after buying, so make sure you understand all the fine print.
In addition, many private lenders have similar programs of their own. Work closely with a lender who can examine all the options and see if any can be combined.
5. Bridge loans
On the other end of the homebuyer spectrum from first-timers are people who are selling one home in order to buy another. Borrowers in that situation—especially at the market’s higher end—might consider a bridge loan to help them make the transition.
True to its name, a bridge loan helps home sellers buy a new house before they’ve sold their current property via a loan using the old home as collateral. Once a seller has bought the new home and sold the old one, the loan is converted into a mortgage for the new home.
Among those homeowners, there’s “more interest than ever in buy-before-you-sell. High-income sellers want to make a noncontingent offer, but a lot of their assets are tied up in the home they currently own.
A bridge loan will generally cost you about 2 percentage points of the loan amount as an origination fee, and you’ll pay an interest rate roughly 3 percentage points higher than a conventional loan while you’re paying the bridge loan.