Are you concerned about the recent surge in home loan interest rates? Wondering what this means for buyers, sellers, and real estate brokers in the coming months and even the 2024 election year? Don’t worry, we’ve got you covered. In this article, we’ll explore some practical interest rate strategies to help you make informed decisions in today’s market.
Buyer Opinion #1: Waiting for Lower Interest Rates
It’s understandable that some buyers may be hesitant to purchase property at these high interest rates. But here’s something to consider – can you afford to wait? Take a closer look at the annual appreciation rate of properties in your local area over the past three years. If inventory is low and demand remains steady or increases, prices are likely to continue rising. Think about the potential gains in three to four years compared to the difference in interest payments. What’s the best way to build wealth for you and your family?
Buyer Strategy #1: Take Advantage of Tax Benefits
Did you know that home loan interest is typically tax deductible in America? With interest rates at 3% or 7%, this benefit can make a significant impact on your finances. By leveraging this deduction, you’re effectively making your homeownership journey more affordable.
Buyer Strategy #2: Unlock Tax-Free Gains
One of the most significant advantages of owning a home is the ability to enjoy tax-free gains when you sell. Thanks to a favorable residential tax law, you can earn up to $250,000 tax-free if you’re single, or up to $500,000 if you’re married filing jointly. And here’s the best part – it’s not a one-time opportunity! As long as you’ve lived in the property for at least two years, you can repeat this process every two years. Imagine the potential financial benefits this can bring to your life.
Buyer Strategy #3: Exploring FHA and VA Loan Assumptions
If you’re looking for a lower interest rate, consider assuming an existing FHA or VA loan. In the past few years, sellers have secured loans at rates as low as 2.5% or 3%. By assuming these loans, you’ll be locking in the original note rate rather than today’s market rate. Keep in mind that qualifying for a loan assumption is like qualifying for a new loan, so be prepared to review your credit, income, assets, and overall risk assessment.
Important points to remember:
- FHA and VA loans are assumable, provided the buyer qualifies. Confirm with the lender that the seller will be released from any liability for repayment of the loan.
- You don’t need to be a veteran to assume a VA loan. Anyone can assume a VA loan if they qualify. However, some sellers may prefer a qualifying veteran to assume their loan to regain their eligibility for future home purchases.
Buyer Strategy #4: Refinancing in a Changing Interest Rate Market
Some buyers hesitate to purchase because they worry about being stuck with a high interest rate if rates decrease in the future. While it’s true that refinancing is an option, many buyers are reluctant to go through the process again and pay closing costs, appraisal fees, and attorney fees.
Luckily, some lenders offer a solution called a “no lender cost refinance loan.” This program provides peace of mind to buyers who purchase or refinance in a rising interest rate market. If rates drop within six months (depending on the lender’s requirements), buyers can take advantage of obtaining a new lower rate without incurring additional costs. Some lenders refer to this program as “Rate Protection Coverage.”
Traditional refinancing typically involves closing costs, appraisal fees, attorney fees, and other expenses. So, when is it advisable for a homeowner to refinance their loan? The “Rule of Thumb” answer is a 2% or more difference between their current home loan interest rate and the current market rate. Consulting with a trusted lender can help you calculate these numbers and analyze when it’s profitable to refinance.
Buyer Strategy #5: Buydown the Interest Rate
If a buyer is seeking a lower interest rate, they can discuss the option of “buying down” the current interest rate with their real estate broker and lender. This involves paying an upfront cost to reduce the rate for a specific period, such as one, two, or three years. The expense of the buydown can be covered by the builder (for a new home), the seller (for a resale home), or the buyer themselves.
It’s important to note that a buydown is considered prepaid interest, and the IRS allows for the deduction of prepaid interest in the year it is paid, rather than spreading it out over the loan’s term. This financing technique has proven to be beneficial for buyers, sellers, and builders in times when interest rates have increased.
In my opinion, it’s crucial for everyone to research and study the benefits of traditional financing combined with the potential tax advantages. Understanding these strategies can help individuals increase their wealth through smart real estate and mortgage decisions.