Mortgage rates are high (7.23% today),
but you may be surprised to learn that we are only around the average rate over the past 50 years.
It looks like we will be in the same kind of place through to summer 2024. Fedwatch then sees the probability of a rate cut increasing, but only by 0.25%. Up to the end of 2024, we could see rate perhaps one percent less than they are today. So if you want to buy a home or sell one and buy another, what can you do?
As a seller, you can price your home lower to entice more buyers, but then you will have less money to put down on your next home. If you bought in the last As a buyer, if you bought your home anywhere between February 2007 and April 2022, you will have a rate of no more than 5%, quite a bit less than today. On a loan of $300,000, that would amount to around $400 difference per month or almost $5,000 a year. How can you buy a home and still get a rate of around 5%?
Two ways, one much cheaper than the other. The first is to buy down the rate permanently. That will cost 1% of the loan amount per 0.25% reduction. On a $300,000 loan, that would be $12,000 per 1%, so $24,000 for 2% to get back to around 5%. That’s really not going to happen. The other alternative is to buy down the rate for a set period, and perhaps until interest rates go down sufficiently to be more affordable. A 2/1 buydown sees the mortgage rate being reduced by 2% for the first year and 1% for the second year, returning to the original rate in the third year. On a $300,000 loan, that would realize a saving of almost $400 a month in the first year and almost $200 a month for the second year. The cost here is just over $7,000. The idea after that would be to refinance at a lower rate. Now of course, this only works if rates are going to go down, but this is likely over the next couple of years. In July, 43% of Realtors in Orlando said that rising interest rates are the biggest challenge facing buyers, causing some buyers to wait out purchasing homes right now or look at lower price points.
As a seller, you can offer a 2/1 buydown as a concession, rather than reducing the price of your home. This actually helps a buyer, since a reduction of $7,000 on list price wouldn’t affect the buyer’s mortgage payment by anywhere close to either $400 or $200 per month. As a buyer, you can ask the seller for this concession and know that your mortgage payments for the next two years will be subsidized.
What will happen to the housing market in the next two years? We are not seeing any kind of significant decrease in the average selling price of homes in Orlando and in fact, prices are pretty flat over the past year, when mortgage rates were over 7%. There aren’t many bargains out there, and since the fear of a recession has subsided, we aren’t going to see a glut of foreclosures which would otherwise cause a market correction. What we are likely to see though, when rates fall, is a race to buy homes. I can’t forecast whether it will as bad as it was in the three years up to spring 2022, but I’m fairly certain it will cause prices to increase, and probably with multiple bids for homes. If you can afford the downpayment on a home that you really like and you can also get a 2/1 buydown concession from your seller, you may just be ahead of the game when rates come down. You won’t be fighting off others for that home you really love, and you may be able to refinance at a rate which is around the same as your first year’s buydown. That’s a real win/win. The third win is that as prices increase, you will gain more equity in your home.
If you are thinking of buying or selling or are unsure what to do, let’s chat. You can email us at doreglobalteam@gmail.com, or call/message on 407-443-6046 or 407-782-6318.
