What it’s Like Home Buying with High Interest Rates

Plus four ways to save money on your home purchase even when rates are sky high.

I miss the Obama years. For so many reasons. But mostly I miss what it was like to buy a home when interest rates were low. Having recently divorced and had the opportunity to purchase a home again as a single gal, I have to tell you how different home buying is when interest rates are double what you're used to. The term “sticker shock” doesn't even begin to cover it.

But, I was recently invited onto local Atlanta TV show ATL&CO to discuss this very topic. Below is the post I whipped up based on my notes and prep for the appearance, because you know I can't let any decent content go to waste.

What does the current interest rate environment mean for both buyers and sellers?
   
The Federal Reserve raised interest rates last month in part to bring down inflation and these sky high housing prices (data from the National Association of Realtors puts the average price of a single family home in America in August 2022 was a whopping $389,000. Yeesh.)

For buyers high interest rates mean your money isn't going to go as far. For sellers it means you won't be able to charge as much for your home as we've seen in the last two years since the pandemic.

So, take the example I used on the show to illustrate how big of a difference interest rates can make on a loan that is hundreds of thousands of dollars. A $400k mortgage loan last year at 3% was around a $1,700 monthly payment (before taxes and insurance.) This year, that same loan at 7% is almost $1,000 more each month at $2,660.

For sellers higher interest rates may mean less competition for you home and that the home may take longer to sell. Interest rates won't keep everyone out of the market, but may impact affordability for some, so it's important to take that into consideration when you are considering listing price for your home.

Four tips for buyers looking to save money in a rising interest rate
environment.

All is NOT LOST and there are ways to save money if you absolutely have to buy a home in an uprate environment. Interest rates may remain where they are for some time, even through 2023, so if you need to buy a home, here's how to do it in a fiscally responsible way.

Rate shop

If this isn't my tried-and-true piece of financial advice getting trotted out for the 97,000th time. INTEREST RATES MATTER. They matter more THE MORE MONEY YOU SPEND. When you are spending HUNDREDS OF THOUSANDS, save as much money as you can by getting the LOWEST RATE THAT YOU CAN GET.

Sorry if I'm shouting, but I'm just really, really passionate about interest-rate shopping. This is how wealth f*cking gets built.

And with online aggregators who will do a soft pull on your credit and present you with rates in a matter of minutes, there is no excuse not to do this. Not in 2022, my friends.

Compare closing costs on the loan and shop for services.

While you are shopping rates you should also look at what closing costs each lender charges — because these are not one size fits all either. One lender could charge you a dramatically different amount in closing costs. If you find a lender with a rate and closing costs that you like, you can absolutely ask a lender to match the quote for you, the way you would ask Amazon or Nordstrom to price match a pair of Nikes.

They may say no, but it never hurts to ask. Especially if it is at a financial institution where you have some type of relationship or standing.

Buy down your interest rate with points

Buying down the rate didn't make sense in the last ten years because rates were crazy low. However, if you do have the cash on hand, buying down the rate a bit may make more sense in today's environment. Rates may continue to go up over the next handful of years, or it may take longer to bring rates down as the government continues to fight inflation.

And since you pay the MOST MONEY IN INTEREST the first five years of your mortgage, it may make sense to buy down the rate. When I bought my house recently, I also bought down the rate to sub 5% after a conversation with my mortgage broker.

The way you “buy down the rate” is by purchasing “points” with your lender. A point is roughly 1% of the home's purchase price, and one “point” will bring down the rate about .25%. You pay for the points up front, at closing.

So, for example, say you are buying a $400,000 house at a 5.5% interest rate. If you buy two points at 1% (roughly $4,000 each), you'd pay $8,000 at closing for the 5% interest rate that stays with you for the entirety of your 30-year mortgage. It stings to part with that cash up front, but the difference is substantial.

For more reading see, “How much house can I afford with a $100k salary?” here.

Put more money down

The amount of money you put down on the home also impacts the interest rate. Lenders will give better rates if you put 20% down or more. Those putting less than 20% down are seen as “higher risk” in the eyes of lenders and so they want to charge you more because you're a riskier investment. (Here's how to save up a down payment in 6 months time.)

What advice would you give to those who are thinking about buying or selling?

#1 – Adjust expectations

In times when the economy is “meh”, it is always good to bring a healthy dose of realism to any financial situation. Bring it with you to the party. Make sure you have it with you when you leave. To repeat:

• For buyers the expectation is: your money isn’t going to go as far.

• For sellers: your home may take longer to sell, or you may have to adjust the price.

You may have to make some compromises on the home. You may not be able to get everything you want. You may have to renovate or choose a fixer to get into your desired location.

#2 – Consider if your current home could still meet your needs.

You may not have to adjust your expectations at all if you can wait out the market, but as I *think* (and industry analysts also believe) that we are in for a bit of a sit, it may be worth it to get creative about how you think about your current home in order to avoid home buyers remorse.

For buyers keep in mind that unless you are moving to an area with a substantially lower
cost of living, you may be happier long-term in your current home with
your low interest rate. Unless you have a bigger budget, you aren't going to be able to upgrade. Are there renovations you could do instead to make the home workable for you in the long term?

For sellers know that while you will likely be able to sell, you’ll then have to buy a home
at these higher interest rates, or with low housing inventory be forced to rent. Is selling
still worth it was prices continue to quickly deescalate?

#3 – Use this time to your advantage

If interest rates are keeping you out of the market, don't worry. There's still plenty to do in the meantime.

For buyers: Take this time to improve your credit, save up a true 20%
down payment
For sellers: Save up for home improvements in cash and use those funds to
improve the home for future sale.

The Fed may or may not be done raising interest rates for the mid-to-near future, so don't fritter away this time.