10 Pro Tips to Take Advantage of Rising Interest Rates
In the current market landscape, savvy prospective buyers stand to benefit significantly due to the prevailing high interest rates.
Anticipating a reduction in mortgage interest rates in the coming months, potentially dipping below the 6% mark by the end of next year, it's reasonable to assume that we'll see a lot of pent-up buyer demand enter the housing market. I don’t believe this buyer demand will be offset by a corresponding increase in available inventory, particularly in the Bay Area, which has always been characterized by high demand and low inventory.
In light of these forecasted market dynamics, here are my Top 10 strategic approaches for buyers to capitalize on this high-interest rate environment and get a great deal on their next home!
If you want to know more, look at specific examples, and dive into the analytics of a specific market regarding home prices and interest rates, check out our market reports.
You can also book some time with me here.
1. UNDERSTAND THE MATH BEHIND RISING INTEREST RATES AND HOW THAT CORRELATES TO LOWER INTEREST
Before we discuss creative strategies, let's examine the math to calibrate our current situation.
Example:
A $500,000 loan at 7.6% interest on a 30-year fixed rate would cost $3,530/month or $42,360/ year.
That same $500,000 loan at 5.5% interest for the same 30-year fixed rate would cost $2,839/month or $34,068/year.
Difference = $691/month or $8,292/year
(Both examples are Principal and Interest only.)
LENDERS’ RULE OF THUMB AROUND INTEREST RATES: For every 1% the interest rates drop or increase, buyers’ purchasing power and payments will change by 10%.
$1M loan amount at 6% interest rate = $6,654
$1M loan amount at 5% interest rate = $6,026 (roughly 10% less)
The big takeaway is that if and when we see interest rates decrease from 7% to 6%, prospective buyers might think they’re saving a little bit of money on their monthly payments. What is more likely to happen is that more buyers will enter the market and drive prices up, negating any small amount current buyers assume they’re saving by waiting for rates to drop.
By not waiting to buy, prospective homeowners can refinance a smaller loan at a lower interest rate. Buyers must understand that the loan amount doesn’t change in a refinance; only the interest rate does. So the savvy move would be to purchase a home for less money and refinance a lower loan amount at a lower interest rate.
2. DON’T TRY AND TIME THE MARKET
If you’re one of those people who are waiting around for the prices to go down and the market to crash, stop trying to time the market; the shift that we're seeing now is because interest rates went up, and if you’re waiting to buy, you’re effectively pricing yourself out of the market.
The best strategy is to purchase when it makes sense for you financially, and if you're looking to buy now, there are great deals on some amazing homes. If rates can change, you can refinance and effectively lower your payment. Yet if rates go down, we're going to see a much more competitive market, and you might end up paying more or even getting priced out.
3. FIND A HOME WHERE YOU CAN NEGOTIATE, AND ASK THE SELLER TO BUY DOWN THE RATE WITH CREDIT IN LIEU OF REPAIRS
PRO TIP ALERT: The seller gives credits for several reasons during the transaction. Say your agent is able to negotiate a 50K credit for you as the buyer, maybe that is done upfront because the property was sitting on the market, or perhaps you did inspections on the property, and the inspection report turned up with a bid for $50k worth of repairs.
Once a credit is negotiated, buyers can use that credit from the seller to do the repairs, buy down the interest rate (effectively lowering their monthly payment), or offset the closing costs for the home, which would keep cash in the buyer's pocket.
In a less competitive market with high interest rates, there are more opportunities to negotiate with sellers. In competitive markets which lead to multiple offers situations, not so much…
4. WE SEE FEWER MULTIPLE-OFFER SITUATIONS
In our extremely competitive market(s) with low inventory, buyers will still face multiple offer situations. It's always been a reality of the market when we have more demand than we do supply, especially in desirable areas and turnkey homes. However, we are noticing a trend where fewer buyers are in the market, resulting in less competitive multiple-offer situations where homes aren’t selling for as much over asking. Back in 2020 or 2021, you might have been competing with 10-12 offers, whereas now there are often only (maybe) 4 or 5.
5. KEEP AN EYE OUT FOR GOOD DEALS IN THE FORM OF STALE LISTINGS AND PRICE REDUCTIONS
Price reductions are an attempt from the seller to revamp interest when a home that has been on the market for a few weeks doesn’t go into contract. Buyers may start to notice a fair amount of price reductions starting to happen.
For sellers: It's essential to price your home correctly from the start, ahead of the market, so that you generate enough interest to get an offer on your home in the first two weeks; then, interest starts to die off. If prospective buyers feel confident that there aren’t any offers on the table, they can see an opportunity for a great deal and leverage to get into a contract with contingencies (a less competitive offer).
6. GETTING APPROVED FOR A MORTGAGE INCREASES YOUR CHANCE OF NOT OVERPAYING AND GETTING A HOME UNDER CONTRACT.
PRO TIP: Get approved for a mortgage from a lender and hunt for good deals, price reductions, and 30+ Days on the Market (DOM).
Picture this: A buyer finds a great home that has been sitting on the market for 30 days, and the seller just reduced the price. That buyer writes a clean offer (non-contingent), and it’s the offer on the table! If you were the seller (assuming it's a fair price for the home), would you take the offer knowing that the buyer is a sure thing and the lender guarantees to close?
Now imagine that you're the seller and you get the same offer, but that buyer hasn’t been approved for a mortgage yet; thus, they have a loan contingency (meaning their offer is contingent on them getting qualified for a loan). If you were the seller, would you accept the offer or wait to see if you could get something better? Most likely, the seller will tell the buyer to get qualified for a loan and then resubmit an offer. By the time the buyer comes back, that property may be sold.
7. LEARN ABOUT NICHE LOAN PRODUCTS AND LENDER GRANTS (A.K.A. FREE MONEY)
Many niche programs work for all types of scenarios, and good lenders will take the time to understand your goals and help you pick a product that will best suit your real estate goals.
A handful of lenders also offer FREE MONEY through grants and lender credits to buyers who purchase houses in certain zip codes and census tracts. My favorite is PNC, which offers up to $17,500 in grants (with some restrictions) for most homes in nine bay area counties. Buyers can use this money to decrease the rate and/or offset closing costs.
8. WRITE A COMPELLING PRE-EMPTIVE OFFER
Sellers are also concerned about rising interest rates and market shifts. How can you use that to your advantage? Consider writing a “pre-emptive” offer!
What if you could identify a listing before it hits the market and write the seller a compelling offer before interest rates change, eliminating the concern about going to market and hoping for the best? What if you made an offer before the seller had to handle the hassle of getting their home ready for the market? There are many ways to create a win-win situation with off-market deals on pre-market listings.
9. BUY A CONDO
High interest rates are making affordability an issue for many first-time home buyers, and they're really hitting the entry-level condo market. Many first-time home buyers don’t realize (and most lenders don’t tell you upfront) that condo mortgage rates can be as much as 1% higher than on a single-family home. In addition to an unreasonably high interest rate, stacked on top of the cost of HOA dues, what is the result? A VERY SOFT CONDO MARKET!
Given the trends in the condo market, prospective first-time buyers can set themselves up for success in the future by purchasing a condo at a discount while rates are up and selling when the condo market bounces back. This could be a great strategy to increase your equity position on your next home purchase.
10. UNDERSTAND THAT MARKET TRENDS ALSO COINCIDE WITH SEASONALITY
Spring buyers are exhausted, and many families take time off their home search during the Summer. From a seasonal standpoint, agents can see the market slow down in July and August, with another small uptick in supply and demand around Labor Day weekend. Then, around mid-November, the market generally slows for both buyers and sellers during the holidays, then comes tax season, and the cycle repeats itself where it picks back up in the Spring.
If you want to know more, look at specific examples, and dive into the analytics of a specific market regarding home prices and interest rates, check out our market reports.
You can also book some time with me here.