While home prices continue to climb modestly nationwide, sales of existing homes are not keeping pace. "Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves," says Lawrence Yun, chief economist at the National Association of Realtors (NAR), which tracks real estate data.
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 7.03% for the week of May 30. That's up from 6.94% the previous week and about the same as one year ago when it was 7.00%.
With interest rates at a perceived high, homeowners are reluctant to put their home on the market – especially if their current mortgage rate is about half of that – because they’ll have to get a new mortgage at a higher interest rate to buy a home. That’s also preventing many from refinancing. If they bought as rates were rising, say at 7.00% - 7.50% or higher during the past two years, refinancing may not make sense financially because of the fees involved and existing interest rates not low enough. Typical guidance is that refinancing makes sense when you can recoup the closing costs on the refinance mortgage and start saving within 36 months.
“Homeowners with mortgages around 3.5% may be feeling boxed in. They don’t want to buy a bigger home or downsize because with either option, they’ll need to take out a new mortgage,” says Jamie Thomas, a licensed Residential Mortgage Loan Originator and real estate sales agent in Texas who also serves on AAFMAA Mortgage Services LLC’s (AMS) board of managers. “It's just a tricky time for a lot of people trying to buy or sell a home.”
The challenge compounds for homeowners selling under duress, he notes. “If my spouse loses their job and I have to sell my $500,000 house with a $400,000 mortgage at 2.5% or 3% and buy a smaller home for $350,000 with a mortgage at 7%, I’m not going to save much month-to-month, and I might be paying lender and real estate fees on both ends,” says Thomas. Depending on your region, fees for purchase transactions can range from 2% to 5%.
Related: 10 Ways to Help Lower Your Interest Rate
How Much Difference Does a Point (or Half) Make?
Even small increases in a mortgage rate can affect monthly payments. Say you want to finance a $250,000 home with a 30-year fixed-rate loan and plan to put 20% ($50,000) down. With an interest rate of 7.0%, your estimated monthly principal and interest (“P&I”) mortgage payment (excluding property taxes and homeowners insurance) would be $1,331, and you’ll pay $279,018 in interest over the life of the loan.
Using those same parameters but with an interest rate of 7.50%, your mortgage payment would increase to $1,398, about a $67 per month higher P&I payment, and you’d pay $303,434 in interest over the life of the loan.
At an 8.0% interest rate, the monthly P&I payment goes up to $1,468, that’s about $137 more per month than at 7.0%, and you’d pay $328,310 in interest over the life of the loan.
Related: Use our calculator to estimate the home price you can afford based on your income, debt, and down payment.
Bringing Your Rate Down
It’s important to keep in mind that if you’re financially ready, this is still a good time to buy. Interest rates are “temporary” in that you can always refinance when they drop and in the meantime you’ll be building equity as a homeowner.
That said, there are several moves you can make to lower your interest rate.
1. Improve your credit score
When you’re financing a home, your credit score may be more important than you realize. Most lenders use FICO® Scores, developed by Fair Isaac Corporation (“FICO”), which typically range from 300-850 points, to gauge creditworthiness. The higher your score, the better track record you have in paying debt, and the lower the credit risk to your potential lender. Just a few points one way or another can affect the interest rate you’ll be offered.
If your credit score is on the low side, an AMS Military Mortgage Advisor can help you develop short- and long-term credit goals and steps to potentially improve your score and assist with getting prequalified for financing.
2. Find an assumable mortgage
With an assumable mortgage, the buyer can purchase a home without taking out new financing. Instead, the buyer takes over, or assumes, the seller's mortgage loan. In our current higher-interest rate market, this can be a big selling point for both parties. Not all home loans can be assumed by the buyer. Mortgage loans insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) are assumable as long as specific requirements are satisfied. (However, for most FHA and VA Loans, a seller must obtain lender approval for an assumable mortgage.) It’s important to note that even with an assumable loan, the buyer will need to meet the lender’s qualifications.
3. Transfer ownership for credit and financial capacity
Since most conventional mortgages are not assumable, there is another route to explore: a transfer of ownership for credit and financial capacity. This would allow the seller to offer the borrower their current mortgage balance and interest rate. When the house is sold, the buyer works directly with the servicer to update the responsible party's information. The challenge with this arrangement for sellers is getting out the equity they’ve gained. “This can still be an attractive incentive for a buyer since they can take over the note at 3% and pay the seller their equity in cash,” says Thomas.
Related: AMS Helps Resolve Credit Problems to Qualify Ex-Navy Homebuyers
We’re Here to Help
Whether you’re thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor, who is a licensed Mortgage Loan Originator, will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs.
Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!