Are the current interest rates keeping you from buying your next home?
You’re not alone. Most buyers I talk to are on the fence, often saying, “We’re waiting for rates to come down.”
But what if I told you we can structure your offer strategically to make your monthly payments more affordable, even in this less competitive market?
Many of my clients have received concessions from sellers, even in multiple-offer situations. Just a few months ago, it was a seller’s market with few concessions. Now, with many buyers waiting on the sidelines, sellers realize they must offer either a lower price or a credit to help buyers lower their rates.
Interest Rate History
To give some context, in March 2022, the Fed made its first interest rate increase since 2018, raising rates from 0% by 0.25% to a level of 0.25–0.50%. Inflation peaked at 9.1% in June 2022. In July 2023, the Fed made its final 0.25% increase, bringing rates to 5.25–5.50%. The Fed funds rate has not been cut since then.
Your Options as a Buyer
Read on to learn about your options as a buyer and the questions you should ask your realtor and lender.
Negotiate a Lower Sales Price
While negotiating a lower sales price might seem like the best deal, there’s an alternative that can save you more monthly. For instance, if a home is listed at $725,000 and you negotiate a $25,000 discount, closing the deal at $700,000 with a 20% down payment means a loan amount of $560,000. At an 8% rate, your Principal and Interest Payment would be $4,109.08.
Offer Full Price and Ask for a Rate Buydown
A more cost-effective option could be offering the full asking price of $725,000 and asking the seller to cover $25,000 towards an interest rate buydown. With 20% down, the loan amount is $580,000. Based on today’s drop rate of 7%, the monthly payment would be $3,858.75, saving you $250.33 per month or $3,003.96 per year.
Seller Credit Option
Let’s say the numbers work for you and you’re good with the monthly payment, but the home needs renovations. After the down payment and closing costs, you might not have money left for renovations. In this case, your best option is to have the seller apply a $25,000 credit to cover your closing costs, leaving you with more cash in hand after closing to create your dream kitchen or bathroom.
Temporary Rate Buydown
Temporary rate buydowns are available in 1-, 2-, and 3-year versions, often advertised as a 3-2-1, 2-1, or 1-1 buydown. If you’re approved for an 8% interest rate, a 3-2-1 program means you get a 3% rate reduction in the first year (resulting in a payment at 5% interest), a 2% rate reduction in the second year (payment at 6%), and a 1% reduction in the third year (payment at 7%). Afterward, you return to the full 8% interest rate for the remainder of your loan or until you refinance. The seller has to cover the cost of the temporary buydown, which equals the savings achieved.
However, a crucial detail about temporary buydowns: you can’t refinance until you have 20% equity in the home. So, if you’re not bringing around a 20% down payment, don’t count on enough equity gain in the next couple of years to refinance. Be comfortable with the full interest rate, as predicting when rates will drop is uncertain.
A Recent Success
Just recently, I helped a young couple secure a fantastic deal on a new construction home. By negotiating a special rate and leveraging seller concessions, we significantly reduced their monthly payments. This made their dream home not only attainable but also comfortably affordable, allowing them to start their new chapter without financial stress.
In Closing
There are various creative ways to make your monthly payment more affordable. Collaborating with a local agent and lender is key to securing the most affordable monthly payment. We work closely with all our lenders, and in this market, we’ve seen our financed buyers benefit from these strategies.
If you are interested in learning more about how you can purchase a home in the Houston area with these creative strategies, give me a call at 832-775-8806. Nest Builders Collective are local experts and would be happy to help you.
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