So you were set on buying a house, but now interest rates have risen and you can’t afford the kind of house you wanted. Well I have some news for you. I’m Kyle Winn, and if you haven’t seen any of my videos I help people just like you buy and sell homes here in Southern California. Now you’re going to want to check out this video because I’m going to give you a few ways to beat the increasing interest rates so you can get into that dream home, so let’s dive in.
Thank you for stopping by to check out this video. So to get into today’s topic, you thought you were ready to buy a house but now you think you can’t afford it with these rising interest rates. Well today I’m going to give you a few ways to work around these higher interest rates, but before we get to that, please be sure to subscribe to this channel so you can see all my future tips and other fun content.
So maybe some of you are wondering why interest rates are now in the mid to high 6’s when one year ago buyers were getting interest rates of 3%? It really revolves around Mortgage Backed Securities, which are basically giant bundles of mortgages that banks sell off to investors so the banks can have the funds to keep writing new mortgages. Now when COVID-19 hit in early 2020, people were predicting that our economy was going to take a huge hit from all of the shutdowns, right, you all remember this. So in order to support the economy and encourage consumers to keep spending money, the federal reserve ramped up their purchases of mortgage backed securities, and since the federal reserve accepts relatively small returns on these investments, this in turn reduces the mortgage interest rates offered to home buyers.
Now throughout 2020 and 2021 the federal reserve was purchasing 10’s of billions of dollars of mortgage backed securities each month, and trust me when I say this is A LOT, and this drove interest rates down to right around the 3% mark that we saw. Then at the beginning of 2022 the federal reserve came out and said that they’re actually going to stop buying these mortgage backed securities, and that caused interest rates to climb steadily from about 3% to about 6% earlier this year. Now why is that? Well, if the federal reserve isn’t buying the mortgage backed securities, then who is? Well that would be Wall Street investors, and the interest rate of 3% that so many people got last year is too much risk and too little return in the eyes of those Wall Street investors. So if the banks want to be able to sell off these bundles of mortgages so they can keep writing new mortgages, they have to increase your interest rates so that the investors would be happy with their return on their investment. Now here we are heading into the last part of 2022 and interest rates are well over 6%, and even creeping up on 7% for a 30 year fixed rate conventional loan. Now I’m not saying this reflects on the minimum return these investors need or anything like that because there’s a lot more that goes into their risk tolerance like the nation’s economic outlook, bond markets, job market, and a whole lot more.
Okay enough of all that, but hopefully that gives you a little understanding of why mortgage interest rates have fluctuated so much over the last few years, and hopefully that made some sense. To help you keep an eye on those mortgage backed securities and up to the minute mortgage interest rates, I’ll include a link in the description below. So go ahead and add that link to your favorites or bookmarks or whatever, and if you find it useful give this video a thumbs up for me.
Alright now I know you’re thinking, cool, that’s all great information, but how do I beat these interest rates of over 6 or almost 7 percent?!
My first tip here is to talk to your lender! I know this sounds silly or too simple, but it couldn’t be more true. Remember I said that mortgage interest rates are in the high 6’s and almost 7% for a 30 year fixed rate conventional loan, but that may not be the best loan for you. Your lender can help you shop for different loan programs based on your individual financial situation, your occupation, military service history, the area you’re looking to buy a home in, and most importantly, your goals for your home and finances. So before you think your home buying goals have been smashed by these interest rates, do yourself a favor and talk to your lender.
Another way to beat these interest rates is to look at a new build. Yes, a brand new home being built right now, where you get to pick out your floors, and counters, and all that fun stuff. Now these builders have in house lenders that are currently offering many incentives. For starters, these new build in house lenders purchase bundles of mortgages at predetermined interest rates that they then sell off to consumers for their new homes. Well if they’re still selling mortgages out of a bundle they purchased a few months ago, that could save you on your interest rate since interest rates have only gone up lately. Another reason to look at a new build specifically, is that many of their in house lenders are offering introductory rates on their mortgages. So for example in Year 1 the interest rate might be 5%, then Year 2 might be 5.5%, then Year 3 might be 6%. This can be a great option that will save you thousands of dollars over those couple of years, but you do need to realize that you need to be comfortable with that Year 3 payment no matter what. Now my favorite reason to consider a new build is that the builders may also offer you a credit that you can apply toward buying down your interest rate. Did you know you could do that? You can pay your lender an up front fee, and they will reduce the interest rate on your mortgage, for the life of the loan. And the best part of buying a new build right now is that many of these builders will pay that fee to buy down the interest rate for you! So if you don’t want to deal with introductory rates and having a new mortgage payment in Year 2 and Year 3, this could be the perfect solution for you to lower your interest rate from the start and lock it in.
Now if you don’t want a new build for some reason, or if they’re not available where you’re looking to live, there are ways to reduce your interest rate on the purchase of an existing home. The first thing I want to talk about is a loan program called the 2/1 buydown. Mention this to your lender so they can walk you through it and see if it aligns with your financial goals. Basically the way this works is that you’ll write an offer on a house, and ask for a seller credit, and this seller credit will be held in an escrow account and be applied toward buying down your interest rate for the first two years of your mortgage. For example, let’s say you get a $10,000 seller credit, and $7000 of that goes toward buying down your Year 1 interest rate to 4.5%. Then the remaining $3000 would be used in Year 2 to buy your rate down to 5.5%. Then Year 3 your interest rate would be at today’s going rate of 6.5%, just as an example. Now you will be qualified on the higher rate with the higher payment, but this loan can be a great tool. First, it will save you thousands of dollars over the first two years of the loan. Second, where are interest rates going to be in two or three years? Nobody knows, but if interest rates go to 8, 9 or 10% then the 6.5% you’ll have will look pretty dang good right? Or if interest rates go back down to 5 or 4 or 3%, well then you saved significantly in Year 1 and Year 2, and you may be able to refinance into a lower interest rate. Either way I think this loan product can help a lot of people.
However, just like with the new builds, if you don’t want to deal with your interest rate changing, and your monthly payment changing, when you write an offer on a home you can still ask the seller for a credit that you apply toward buying down the rate for the life of the loan. So instead of 6.5 or almost 7% maybe you’re able to buy it down to 5.99% and call it a day and say I’m good.
Now there are so many ways to save on your mortgage interest rate, and as a result your monthly payment, but these are just a few of my favorites at the moment. But if you don’t take anything from this video, just do me a favor, if you’ve had even the slightest thought about buying a home but your discouraged for some reason thinking you can qualify for it or afford it, just please talk to your lender. That conversation will be free, and your goals of buying your next home may be closer than you think. Well thank you for watching, I hope you learned something here with me today. Again I’m Kyle Winn, be sure to leave me a comment below if you have any questions.
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For up to the minute information on mortgage backed securities and mortgage interest rates, this is one of my favorite resources: https://www.mortgagenewsdaily.com/