Northern Wasatch Association of Realtors
With the rapid rise in mortgage interest rates, the real estate market is beginning to change as the red-hot conditions finally head back to normal.
While it’s still an active seller’s market, the situation is becoming more favorable to buyers. For example, there are more homes for sale, there’s more time to make decisions, and there are fewer multiple-offer situations.
While high home prices and affordability remain a challenge, the changing market is providing home buyers with new opportunities and a much-needed reprieve from the ultra-competitive conditions.
Here are some tips for navigating the higher mortgage rates and taking advantage of the improving market conditions.
Tip: Consider how long you’ll be in the home
With the steep rise in interest rates, it’s important for buyers to be strategic when choosing a loan. When interest rates were in the two or three percent range, getting a 30-year fixed-rate mortgage was a no-brainer. With today’s more expensive financing, it makes sense to think about how long you’ll be in the home.
If you’ll be in the home for less than 10 years, you might want an adjustable-rate mortgage (ARM). The rate on an ARM is fixed for a certain number of years — for example, five, seven or 10 years — then resets based on market conditions after the initial period.
ARMs tend to be cheaper than fixed-rate loans. As of Freddie Mac’s June 16 survey, a 30-year fixed-rate mortgage was 5.78% compared to five-year ARM at 4.33%.
If you’re worried about the rate reset, there are some programs that put a cap on how much the rate can increase in the future. If you choose a loan without a prepayment penalty, you can also refinance if interest rates drop in the future.
Finally, if you’re looking for a lower interest rate, you also have the option to buy points, which will reduce your rate. However, lenders caution that it doesn’t make sense to pay a lot of money to buy down your rate if you won’t be in your home for an extended period of time.
Tip: Shop around for houses and mortgages
While the housing shortage is far from over, buyers are beginning to benefit from a recent uptick in the number of homes for sale.
For example, in Weber, Davis and Morgan counties, housing inventory more than doubled in May compared to last year. The average amount that sellers received over their asking price also declined. Finally, months of supply — which measures market competition — also ticked up in all three counties, indicating more favorable conditions for buyers.
With these improvements, buyers will have more time to shop for homes. Take that time to see a variety of houses and carefully consider your decision before making an offer.
Depending on your market, you may also want to ask the seller to help pay for your closing costs. Talk to your Realtor about current conditions in your area so you know how quickly to act and what to ask for.
Along with house-hunting, taking the time to shop for a mortgage is also important. Make sure to compare rates and fees from a variety of lenders — a process which could save you thousands, especially in a higher interest rate environment.
Tip: Include important contract safeguards
During the past two years, many buyers have gone to extreme measures to secure a home. As the market changes, buyers can better protect themselves.
For example, you’ll want to make sure your contract allows you to thoroughly inspect the home and have it appraise at or above the contract price without losing your earnest money. If possible, you’ll also want to avoid escalation clauses that increase the price you pay based on other buyers’ offers.
To learn more about navigating the current interest rate environment, talk to a local lender. To learn more about market conditions and real estate competition, contact a local Realtor. Find one at NWAOR.com.