One of the most significant changes our sales team at SouthPoint Financial has been tracking over the last 6 months is rising interest rates. Recently, we have covered some of the reasons that swing is happening, including a downturn in financial markets and a cooling off from the red-hot housing market we saw during the pandemic.
As a result, we are getting asked more and more questions about how homebuyers can adapt to rate increases.
Here are four ways that you can take advantage of increased rates and avoid common pitfalls.
Cash is King
A common strategy recommended to homebuyers when mortgage rates increase is compensating with higher down payments. If you can save more money for a down payment, this can often reduce your mortgage rate in the face of high averages. You will want to look at the rate of return the investments you are considering pulling from are making first. For example, if the interest rates are 6% and you have been making 10% on the investment, one would be right to question putting down less money in that case. You will want to look into your portfolio specifically to see how it has been performing versus current mortgage interest rate terms.
A recent report from Redfin confirms that this historic trend is holding with recent rate increases, noting that "The typical U.S. homebuyer who took out a mortgage in July made a $62,500 down payment, up 13.6% from a year earlier and almost twice the median $32,917 down payment in July 2019, before the pandemic." This spike in average down payments is around five percent less than it was during May and June. Since this strategy to compensate for rate increases is well-known, typically the next question is, where do I get extra cash?
Where to Look
When it comes to finding extra cash to increase your down payment, one tactic is to liquidate assets. Generally, we advise against using any assets you have allocated for retirement. These funds are harder to recoup in the long run, liquidating them derails compound interest over time, and there are often tax penalties for dipping into these accounts before retirement age. If liquidating assets is something you are considering, our seasoned loan officers at SouthPoint Financial are happy to advise you on where to start. Non-retirement investment accounts and assets that do not appreciate over time are a good place to start. Aka borrowing from yourself. Future tax returns are also time to recoup funds.
It is important to think about your overall financial picture if you are considering taking out a mortgage loan while interest rates are high. Make sure that you have a full breakdown of all your monthly and annual expenses when you are looking to purchase a home. This budget should look different than it did before inflation, with relevant increases for everyday goods and utility bills.
New Tools & Opportunities
There are a lot of ways that our seasoned loan officers at SouthPoint Financial can help you navigate these market shifts. Negotiating is on the table. Work with an experienced real estate agent who has skills in negotiating deals in a normal market. We have many Preferred Partners in your area to help guide you in the home shopping experience.
Written by: Patricia Eubanks, Vice President