00:46 Think Like the Bank
02:20 How to Combat the Rate
03:58 How this Affects Sellers
As we all know, mortgage interest rates have changed a lot in this past year. It has been unpredictable, but suffice it to say rates are high. What does that mean for you? It impacts both buyers and sellers, so let’s talk it. Both sides. This a part of a short series I’m doing relevant to the 2023 real estate market so I am keeping it relatively short in context. I hope you’ll stay with me, and if it’s relevant to you, please subscribe, share and comment. Let’s get into it.
When budgeting for your new home, it is a good idea to think like the bank. If you have not already, you want to go ahead and get pre-approved or prequalified for a home loan. This will walk you through the process of a loan application which also checks off one of those boxes you have to check before you go to purchase if you need to borrow money. But also it will help you understand what the qualifications are. Beyond just a good credit score, you have to keep a low enough debt to income ratio and that ratio is going to weaken as the monthly payments for your new home loan go up. Basically they look at your existing monthly credit debt vs your existing income to know how much you can spend per month. Interest rates are one of the ways the monthly payment will go up, so all this information you get from your lender is exactly what you need when budgeting for your purchase. Of course, you need to save money for your down payment, and the better you are at saving and keeping your credit debt low, the better your chances are of getting approved. But once you are approved, this tells you how much money you can spend on that new home. When I say, “think like the bank,” what I mean is that if you are approved to spend $500,000 based on your pre approval, you can’t be looking at $600,000 homes. You need to stay inside the budget the bank will give you. But also, as you look, if you have the ability to pay down certain debts to reduce your debt to income ratio, this may help increase how much you can spend. But there are ways that you can directly combat the interest rate as well.
When I’m searching with buyers I work with, I always suggest padding our budget number a little bit, and I do that for a couple reasons. One is, if a property has been sitting a while, the sellers may be willing to come down on the listing price to encourage the sale. Another is that whether or not they can come down on the price, they are likely to be accommodating to other concessions, like paying your rate down, or paying for other closing costs that can help you stay within your monthly budget. Most banks have what’s called a 2-1 buy down available these days. This is when the Seller agrees to pay a fee upfront that allows the Buyer to get 2 points off in their first year, 1 point off in their second year, and on the 3rd year the rate goes up to what they qualified for. To use our current example, on a $500,000 purchase, this can reduce that monthly payment by as much $500 per month in the first year, $250 in the second year! Also, there’s typically no pre payment penalty, and no penalty to refinance for a better rate if market rates come down. But the other option you always have is to buy down points from your rate permanently – this is costly but might feel a little more secure if you’re not confident that rates will drop in the next 2 to 3 years. A good agent will be able to find out what a Seller is willing to do to help make that sale happen, and you don’t want to feel left out of an opportunity when they are out there.
Now this last point does bring me to one last thing and that is how all this can affect Sellers. I’m seeing Sellers and Listing Agents catch up to this as the year has trucked on, but what I just described is a good reason to make sure that you are not overpricing any property on the market. Most of the properties in the markets I work in, in both Alabama and Tennessee haven’t seen any tangible reduction in value, so there’s no reason to think that your house isn’t worth the same as your neighbor that sold for that crazy price – as long as the neighbors house looks like yours, has the same updates and upgrades, and level of maintenance. Because that’s how you know how much your house is worth, comparable sales close by that happened recently. If you price the house according to the market, you’re much more likely to get what you expect and to sell sooner than later. This also affords you more leverage when being asked for concessions that will eat into your bottomline. There will, more than likely, be fewer reasons for Buyers to ask for more from you if you are not overpriced and as such, haven’t sat on the market for too long. In some places it can just take a bit longer to sell, but pricing is the main thing that will dictate the offers you get.
Obviously there are some more intricacies to dig into in this arena. I have other tips and market info on the channel so feel free to comb through and see more. But I hope you enjoyed and will tap that notification bell or subscribe to see more videos like this one, and others where I can get into more detail. I thank you for watching, and I’ll talk to you soon!