If you bought a home in the past few years, you likely locked in a rate below 4%. In fact, according to Goldman Sachs, 99% of borrowers have a mortgage rate lower than the current market rate. (Fortune)
And you know what they say - you shouldn’t let go of a good thing. But we understand that life changes. Maybe it’s been a few years and now you need more space, you want to be in another school district or your commuting situation is different. Yet you don’t want to swap out your rate for something in the 7% range.
The Challenge of Buying a House with High-Interest Rates
Buying a home with high-interest rates can be daunting, especially if you already have a mortgage with a low-interest rate. However, there are ways to navigate this challenge and maximize your current situation. In this article, we will explore strategies to overcome high mortgage rates and maximize your financial opportunities. We will also discuss the considerations of buying a house in a market with high-interest rates and provide insights into determining a good interest rate for your specific circumstances.
Ways to Get Around High Mortgage Rates
As agents, we’re solution-oriented and take pride in developing creative strategies for our clients. So we spoke with lenders and financial advisors and used our own expertise in the industry to determine the best course of action in this market, and this is what we discovered:
A 30-year mortgage rate below 4% is without question one of the best assets you will ever own. And even better, you can easily leverage this rate to create an income-producing asset.
If you don’t want to waste your current mortgage rate, here’s what you can do: transform your sub 4% property into a cash-flowing rental and use this income (and maybe also your equity) to upgrade to your next home.
Sometimes instead of fighting reality (like wishing for lower interest rates) it’s better to take advantage of what’s in front of you. And what you have as a current homeowner is an incredible opportunity to produce income and build wealth.
Renting out your home can be a smart way to generate an additional revenue stream and cover your mortgage payments. Depending on the location and size of your home, you may be able to earn a steady stream of income that can help you pay down your mortgage faster, or even cover the full cost or more of your monthly mortgage payment. In addition, by renting out a property, you can generate additional income that can increase your debt-to-income ratio (DTI), which is a key factor lenders consider when determining your mortgage eligibility.
And while renting out your home, you are also taking advantage of increased home values and building equity. It’s no secret that home prices have increased over the past few years and historically speaking real estate is an appreciating asset. When a home appreciates in value, it leads to an increase in equity for the homeowner, which is the difference between the current value of a property and the amount of mortgage debt owed on it. A higher level of home equity can make it easier to potentially obtain a home equity line of credit, which can provide access to additional funds to use towards the purchase of your next home. This is an easy way to go from owning one property to owning two, with one of them being income-producing, which puts you on the path to building wealth.
If you want to learn more about the exact tactics to use so you can move without losing your sub-4% rate, you can sign up for our free 3-part email series.
Should you buy a house with high-interest rates?
So maybe you're convinced that you want to rent out your home and use the equity to buy a new one. But the current interest rates have a lot of people asking - is now the right time to buy a house?
It’s estimated that for every 1% drop in interest rates, 5 million more buyers enter the market. So the question for many buyers is whether they want to buy a home with higher interest rates, but potentially less competition. Or if they want to wait until interest rates go down which will allow more buyers to enter the market and potentially increase home prices.
As a simple illustration, let’s say you buy a $1,000,000 home at a 7% interest rate with 20% down. Your monthly payment would be $6,046. If interest rates go down to 6% but competition increases, you may pay $1,100,00 and your monthly payment would be $6,066.
This is just a general illustration, but the point is that high-interest rates shouldn’t always keep you from buying a home. Interest rates are a tangible factor that you can calculate and possibly hedge against, but buyer competition is an invisible factor that you can’t predict - and it can be a powerful one.
Then What’s a Good Interest Rate for Buying a House?
A good mortgage rate is different for every person. In today’s market, a good rate could be 6% for one borrower and 8% for another. Mortgage rates fluctuate all the time - so a “good” rate could look drastically different from one day to the next. Right now, mortgage rates for a 15-year fixed loan generally start in the mid-5% range, while rates for a 30-year mortgage typically start in the mid-6% range.
An important thing to note – your interest rate is personal.
It greatly depends on your personal finances, but the overall market can provide context for your individual rate. Many of the rates advertised are for “prime” borrowers: those with high credit scores, few debts and very stable finances. Your rate also depends on factors such as the type of mortgage you are qualifying for (conventional, FHA, VA, etc.) , your loan term (15 years v. 30 years), and your loan’s purpose (initial financing v. refinancing).
An attractive rate for one borrower may be way too high for another. So it’s not a question of what’s a good rate in general, but what’s a good rate for you? Discussions with us and your lender can help guide you in determining the best rate for you.
The Decision is Personal
Buying a house with high-interest rates presents challenges, but it doesn't have to be a deterrent. By exploring alternative strategies and considering the interplay between interest rates and buyer competition, you can make informed decisions that align with your financial goals. Remember, a good interest rate is subjective and dependent on your personal circumstances. Consultation with professionals in the field can provide invaluable guidance in securing the best rate for your unique situation.
For more in-depth tactics on moving without losing your sub-4% rate, sign up for our free 3-part email series here.