Think Mortgage Rates Are Too High?

6 Alternatives San Diego Homebuyers Should Explore

If you've been thinking about buying a home but today's mortgage rates are making you hesitate, you're certainly not alone.

One of the most common concerns I hear from buyers is: “I like the house, but I don't like the payment.”

That's an important distinction.

The house may not necessarily be the problem. The way the purchase is being financed—and the way the offer is structured—may deserve a closer look before you decide to put your home search on hold.

No one can reliably predict exactly where mortgage rates will be six months or a year from now. Instead of trying to time the market perfectly, it may be more useful to understand the options that could be available to you today.

Here are six strategies worth discussing with your real estate agent and a qualified mortgage professional.

1. Ask Whether a Seller Credit Could Help

When buyers negotiate for a home, price tends to get most of the attention. But price isn't the only potentially negotiable part of a real estate transaction.

Depending upon the property, market conditions and loan program, a seller may be willing to provide a credit toward certain allowable buyer costs.

That money may potentially be used toward eligible closing costs or, when permitted, a mortgage-rate strategy.

Why does this matter?

Imagine a seller is willing to negotiate $10,000. Many buyers' first instinct would be to ask the seller to reduce the purchase price by $10,000.

But a $10,000 reduction in the purchase price does not mean your monthly payment drops by $10,000—or anything close to it.

Depending upon your particular loan, using some or all of that negotiated amount toward allowable financing or closing costs could potentially have a more immediate impact on your cash requirements or monthly housing expense.

There isn't one correct answer for every buyer.

The important question is:

Where would those negotiated dollars benefit you most?

That's a conversation worth having before writing an offer.

2. Explore a Temporary Mortgage Rate Buydown

You may have heard terms such as a 2-1 buydown.

A temporary buydown generally uses funds contributed upfront to reduce the borrower's effective monthly payment during the initial period of the mortgage. The exact structure and permitted sources of those funds depend upon the loan program and lender.

With a qualifying 2-1 structure, for example, payments are generally calculated during the first year using a rate two percentage points below the note rate and during the second year using a rate one percentage point below the note rate. The borrower then makes payments based on the full note rate after the temporary buydown period ends.

This can provide some breathing room during the first couple of years of homeownership.

But there's an important question buyers need to ask:

Can I comfortably afford the full payment when the temporary assistance ends?

A temporary buydown shouldn't be used to disguise an unaffordable house. It is a financing tool—not a substitute for a realistic budget.

3. Consider Paying Points for a Permanent Rate Reduction

Another possibility is a permanent mortgage rate buydown, commonly associated with paying discount points.

Instead of temporarily reducing the payment, discount points involve an upfront cost paid in exchange for a lower mortgage interest rate, subject to the lender's pricing and loan terms.

This can be attractive to some buyers who expect to keep the property and mortgage for a long time.

But paying points doesn't automatically make financial sense.

One important consideration is the break-even point.

If paying additional money upfront reduces your monthly principal-and-interest payment, how many months of savings will it take to recover that initial expense?

If you expect to sell the home or refinance before reaching that point, paying substantial money upfront for the lower rate may be less advantageous.

Ask your lender to show you several scenarios side by side.

4. Don't Automatically Dismiss an Adjustable-Rate Mortgage

Adjustable-rate mortgages, commonly called ARMs, sometimes get an immediate negative reaction.

But an ARM is another financing structure worth understanding before automatically accepting or rejecting it.

An ARM generally provides an initial interest-rate period followed by potential rate adjustments according to the terms of the loan.

For some buyers—particularly those who have a well-supported reason to expect a shorter ownership or loan period—an ARM may be worth discussing with a qualified lender.

For others, the predictability of a fixed-rate mortgage may be much more appropriate.

Before choosing an ARM, understand its adjustment schedule, index, margin, caps, maximum potential payment and risks.

And don't make a home affordable on paper simply by assuming you'll be able to refinance later.

5. Look for an Assumable Mortgage

Here's an option many buyers don't know to ask about.

Certain government-backed mortgages may be assumable, subject to applicable program requirements and approval by the loan servicer or lender.

That means a qualified buyer may sometimes be able to take over an existing mortgage rather than obtaining an entirely new loan at prevailing market rates.

If the seller has a significantly lower mortgage rate, that can certainly get a buyer's attention.

However, there's another number that matters just as much:

The seller's equity.

Imagine a homeowner is selling for $700,000 but only owes $450,000 on an assumable mortgage.

Even if a buyer qualifies to assume that $450,000 loan, there is still a $250,000 difference between the existing loan balance and the purchase price.

How will that difference be funded?

That's why an attractive assumable rate doesn't necessarily mean the transaction will work for every buyer. But when the circumstances line up, it's certainly an option worth investigating.

6. Compare Lender and Builder Incentives

Not every mortgage company prices a loan exactly the same way, and buyers purchasing new construction may encounter builder-affiliated financing incentives as well.

An advertised low rate can certainly look attractive.

But don't compare rates alone.

Look at the entire financial picture, including the interest rate and APR, points, lender fees, available credits, closing costs, required down payment, mortgage insurance when applicable, loan terms and total cash needed to close.

A lower advertised interest rate isn't automatically the least expensive loan.

Ask lenders to provide comparable scenarios so you can evaluate the complete cost of borrowing.

Should You Wait for Mortgage Rates to Fall?

Maybe.

Waiting can absolutely be the right decision for some buyers.

But I wouldn't base that decision solely on the belief that mortgage rates are certain to fall.

They may decline. They may remain relatively stable. They could also increase. None of us knows with certainty.

Instead, consider asking a different question:

“Can we create a home purchase that makes financial sense for me based on the information and options available today?”

If the answer is no, waiting may be the appropriate decision.

But if the answer is yes, you can evaluate the opportunity without having to correctly predict the future.

Before You Stop Your Home Search, Ask for the Numbers

If mortgage rates are keeping you from buying, don't just ask a lender:

“What's today's rate?”

Try asking:

“Can you show me several different ways this purchase could be structured?”

Ask about a standard fixed-rate mortgage, points, temporary and permanent buydowns, seller credits, adjustable-rate options when appropriate, and other loan programs for which you may qualify.

Then look at the numbers side by side.

Your real estate agent can also help identify properties where the seller's circumstances and current market conditions may create an opportunity to negotiate terms that help you—not simply negotiate the purchase price.

A home purchase is much bigger than an interest rate.

It's about the price, financing, cash required, monthly payment, negotiating strategy, expected length of ownership and your personal financial goals.

Understanding how those pieces work together can help you make a much more informed decision.

Thinking About Buying a Home in San Diego?

At Crisafulli & Campbell, we help buyers look beyond the listing price and understand the many moving pieces involved in purchasing a home.

With more than 23 years of real estate experience and 300+ transactions, we know that a successful purchase isn't simply about finding the right house. It's also about asking the right questions, evaluating the options and negotiating with your individual goals in mind.

Whether you're considering your first home, moving up, relocating to San Diego or using military benefits to purchase a home, we'd be happy to help you explore your options.

Crisafulli & Campbell | REALTORS®
Coldwell Banker Global Luxury
San Diego East County & South Bay

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This article is intended for general educational purposes only and is not mortgage, financial, tax or legal advice. Mortgage programs, rates, costs, qualification requirements, seller-contribution limits and availability can change and vary by borrower and lender. Consult a qualified mortgage professional regarding your individual circumstances.