What Does My Mortgage Look Like At 7%?
The question is a good one, and not quite as simple of an answer. Interest rates have skyrocketed since February 2022 which were as low as 3.265%. On the 20th of October 2022, rates topped 7.6%.
How do buyers win in this staggeringly unique market? Can or should you buy something that seems so overpriced at an insane interest rate? Most importantly, what does a 7% mortgage rate look like for you in real life?
Well, let’s take a look at a couple of these questions and attempt to answer them.
If you bought an average-priced home of $600,000 with 20% down in February, your principal & interest-only payment was $2092/month. Purchasing that same home 7 months later in the same year would cost $3390/month.
And, housing prices have not dropped inversely from the rising interest rates, causing a very unhealthy buying environment. If you ask a lender they will tell you rates are just slightly over the hundred-year average of about 7%.
So, what are you getting by buying with a high-interest rate right now?
The first thing to answer is how to obtain a mortgage in this market. One way to get a slightly better rate is by paying down points. Buyers can pay points to get your rate more attractive. For example, a buyer with 20% down and excellent credit can qualify for a 7.375% interest rate. If 2.5 points are available to buy down your rate to 6.625%, then you can pay to slightly lower your fixed rate and in turn provide some monthly mortgage relief. This is separate from your down payment.
The downside is you are substantially increasing your closing costs, which means you need to bring more money at closing. However, this option typically will have a break even point in three to five years which we can help you calculate. Ultimately, this may not be the best financial move for buyers who plan on moving or refinancing quickly.
A better option, however, may be a 2-1 Buydown. This option offers the ability to have a lower interest rate for the first two years of your loan. To get started, you must qualify at the market 7+% interest rate. So for example, you could get a loan with a 5% rate the first year, 6% the second, and then 7% from years 3-30. This option provides instant and more drastic relief to your monthly mortgage number. The con is that the buyer cannot pay for this themselves, but rather get the seller to contribute a certain amount in concessions in the contract. So, negotiations must take place when writing an offer to get the seller to pay for this option for you.
However, this would take the above example of a 7.6% interest rate and the $3390/month mortgage down to $2755/month in the first year, and $3065/ month in the second year. The point of this option is to simply refinance the loan before the higher rate starting in year 3 as interest rates improve in your favor. Also in the event that rates do not improve in three years, you are still locked in a lower rate of 7% instead of being at a higher market rate.
What do you get with a 7% mortgage?
In the current market, you can have your choice of property.
Buyers for the past two years have been fighting tooth and nail in order to get undercontract on a property they want by offering $40,000-$80,000 over the asking price, waiving contingencies and appraisals, and crippling their negotiating opportunities. Right now, buyers can have a red-carpet experience from sellers, negotiate terms, and not waive contingencies.
Also, sellers are more willing to provide the 2-1 buy-down option to buyers. As the market slowly cools due to the high-interest rates, the appraisals are still coming in higher. This means sellers are more open to contribute to the buy-down option. In a hot market where buyers are fighting over a property and pushing the price above asking, in turn causing appraisals to most likely come in lower than the contract price. Buyers in the hot market of the past 2 years would continually find themselves needing to come up with an extra $50,000- $100,000 to get the deal done and have a house.
In contrast, the current 7% mortgage market is weeding out a large
number of buyers, providing a buyer with the ability to get the property that they want.
In summary, the current market gives the buyer the power to choose the best property, the location they want, negotiate terms, and obtain a 2-1 buydown option for further relief. The buyer must deal with a “higher” interest rate. However, lending experts are forecasting the rates to be slashed in the next 3-9 months in order to stimulate a market that is in a recession.
So in summary, what does a 7% mortgage look like? Having the buying power back, the ability to negotiate a better deal, avoid low appraisals and skip the feeding frenzy that low-interest rates create. You also retain the ability to refinance your property with no pre-payment penalty when rates come down.
Is now a good time to buy? The answer might just be yes.