Halloween is spooky enough on its own, but with high interest rates and low inventory, home buyers this season may be feeling frightened for different reasons. Yet this fear is unfounded. With a well-executed strategy and a big-picture outlook, purchasing in our current market can be far from ghoulish — and actually a positive experience.
Let’s tackle those hair-raising interest rates. First, remember that the rate you start with isn’t set in stone. For example, if you purchase with a standard 30-year fixed mortgage, you’ll be able to refinance in a few years to a lower rate, ultimately saving quite a bit over the life of the loan.
An adjustable-rate mortgage, commonly referred to as an ARM, is an alternative tactic. ARMs are long-term home loans with two periods: a fixed period and an adjustable period. Compare this to a fixed-rate mortgage, which retains the same interest rate over the life of the loan.
During the ARM’s fixed period — typically the first five, seven, or ten years of the loan —your interest rate won’t change. During the adjustment period, your interest rate is adjusted to a benchmark, typically set by the U.S. Treasury or the Secured Overnight Finance Rate. The strategy here is to refinance when the fixed rate becomes lower than your current rate.
Another trick of the mortgage trade is the buydown. A buydown is a way for a borrower to obtain a lower interest rate by paying discount points at closing. Discount points are a one-time fee paid upfront. In the case of discount points, the interest rate is lower for the loan term.
An alternate form of buydown occurs when the points purchased reduce the interest rate for the first few years of the loan. This arrangement is typically paid for through funds escrowed by the seller. Since the interest rate is lower during this time, the borrower’s monthly mortgage payments are more affordable. In this scenario, the seller will often increase the purchase price to compensate for the costs of the buydown agreement.
It’s important to discuss these options with your agent and lender, so you can confidently navigate the market.
Regarding our market’s inventory, it’s still low in terms of a balanced market. However, more homes are available than in the recent past. This slight increase in inventory gives buyers more options and, more importantly, more time to thoughtfully consider their next home. The days of cut-throat bidding wars and removing valuable contract contingencies — such as the eyebrow-raising inspection objections — look to be behind us for now.
Even in this season of ghosts and goblins, the scariest thing one can do is sit on the sidelines, continuing to be spooked by the rising prices and low(ish) inventory. However, if you don’t take the leap now, you may just mourn not purchasing sooner.
By Sean McIllwain. Sean is the founding broker of Mod Boulder Real Estate. Call 720.252.6051 or visit modboulder.com.