Tips for buyers and sellers at the spring market – Natural Self Esteem

During the last quarter, we have seen interest rates for the most preferred interest rate rise from 3.5% to 4.5%. While those rates are still historically some of the lowest in decades, that fact may not make you feel better about having the opportunity to pay more for your first or next home.

This week’s rate is the highest we’ve seen in two and a half years. Loan officers expect further rate hikes as the Federal Reserve (the “Fed”) tries to control inflation. Basic economics tells us that more expensive credit slows spending, which in turn lowers prices. There can be a fine line between inflation, control and recession.

People looking for a traditional loan of $647,200 or less with a 20% down payment are likely to get the best 30-year fixed rate if they have a salaried job and a credit score greater than 740.

Using an example of a typical $750,000 DC townhouse with a $150,000 down payment, the difference between the principal and interest payment at 3.5% and 4.5% is $346 per month, without accounting of tax-deductible mortgage interest.

An interest premium is often paid for the purchase of a condominium or cooperative apartment, for self-employment, for a smaller loan as well as for lower down payments or larger loans.

So what can you do to minimize the impact of a rate hike?

First, make sure your credit is sparkling clean. Contact a loan officer for a copy of your merged credit report (Equifax, Experian, and Trans Union) to avoid surprises. Don’t start paying off debt or closing credit cards without input from your loan officer. There’s such a thing as good debt when it comes to credit.

Look after your mortgage and consider alternative mortgage programs. For example, as interest rates rise, variable-rate mortgages with fixed installments of 5, 7, or 10 years can become more affordable. A 30-year fixed rate, which is often considered the safest bet, may not be as desirable if you’re not going to keep the house for 30 years.

Look for benefits you are entitled to. DC, Maryland, and Virginia all have programs that cater to people on low to middle incomes or who only have 3% for a down payment. Funds for these programs may have been secured when interest rates were lower, with the savings being passed on to consumers.

This should be the time to look for sellers who got decent FHA mortgages when interest rates were lower. In addition to the lower interest rates, the cost of taking out such a mortgage is less than taking out a new one, so you may also save money on closing costs. VA loans can also be assumed by active duty military or veterans, or by others in certain circumstances.

Get an estimate of your mortgage payment at different interest rates from your chosen lender. Even if you can afford the payment, it’s best not to be surprised as you go through the process. When you find an interest rate that gives you a comfortable monthly payment, lock it in so your rate doesn’t go up if or when the Fed makes another adjustment.

Consider paying points to lower your interest rate. One point equals one percent of the loan amount, but you can “buy” the interest rate down in increments as small as 1/8 percent. When interest rates were above 10%, it was quite common for sellers to pay points to help a buyer pay off their loan. While I don’t expect this to happen anytime soon, the buy-down process still exists.

Find a cash injection to lower your loan amount. The National Bank of Mom and Dad is a common place to receive monetary gifts. In 2022, either parent can give a gift of $16,000 to a child or grandchild with no tax consequences for the giver or recipient. Contact your tax advisor for more information.

If you have a 401k pension plan with your employer or a federal savings plan, you can borrow money from it with no penalties and pay it back with interest. Most lenders will not count this against your debt load.

Finally, you may need to adjust your expectations for the size and location of your potential home, as any increase in rates will affect everything from entry-level condos to luxury homes. Still, with the Fed expecting rate hikes to be incremental through 2023, this could be the best time to buy.

Valerie M Blake is a licensed Associate Broker in DC, Maryland and Virginia with RLAH Real Estate. Call or text her at 202-246-8602, email her at DCHomeQuest.com, or follow her on Facebook at TheRealst8ofAffairs.

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