What is the best way to buy a home today and afford my monthly payment?

How do I secure a home today with a below market interest rate?

Today's interest rates are all over the news. It's impossible to ignore. While we are just a couple of years removed from all-time low interest rates in the 2% range, we are now experiencing rates that are the highest in 20+ years. So, is there a better way to secure a home? Or is it best to wait until rates fall? While everyone has their own opinion on the best time to buy, we are going to discuss 5 ways to secure the best interest rate on your home today.

1. Ask for seller concessions when you make an offer. These seller concessions can be used for an interest rate buy down.

On a VA loan, it is allowable for a buyer to ask a seller for up to 4% of the purchase price to be used for seller concessions, as well as asking for the seller to cover loan closing costs. For easy math, this means a buyer could ask the seller for up to $16,000 in seller concessions on a $400,000 home, as well as asking for loan closing costs to be covered by the seller. These seller concessions can be used for a permanent or temporary interest rate buydown in order to achieve a more affordable monthly payment. 

Many buyers today are opting for a "2-1 Buydown", which is where the lender calculates what amount of seller concessions are needed for a 2% below market interest rate for year one of the loan and a 1% below market interest rate for year two of the loan. On year 3, the interest rate would default to "today's rate" that the buyer locked in at, and it could never go above that. Ideally, interest rates will come down over the next 24 months, which will allow buyers to refinance. Also, many buyers feel confident in future raises and future income after two years, which makes this an ideal arragement. 

2. Find a home that is offering a VA assumption.

Many sellers purchased their homes when interest rates were below 4%, making their homes ideal "assumption" opportunities. Work with your Realtor to find a home that is offering a VA assumption. If you have your own VA entitlement, you would use it on your assumption purchase, and agree to release the sellers' VA entitlement so they could use their entitlement on a future home purchase. If you don't have your own VA entitlement, you will have to ask the seller if they are willing to part with theirs in order to have you assume their loan when you purchase the home. Of note: on an assumption purchase, you are only able to assume the existing loan amount at the existing rate. If the home you want to purchase is listed at $500,000, and the existing loan at a 2.5% interest rate is $400,000, you will need to bring $100,000 to closing in order to purchase the home at the existing 2.5% interest rate. VA assumptions can also be a tool used by investors to purchase investment properties, but again, the seller would have to agree to part ways with their VA entitlement. Instead of using a lender of your choise on an assumption purchase, you would use the lender who currently holds the existing mortgage. 

3. Find a home that is offering a FHA assumption.

This works very similarly to the scenario above, but it does not involve the component of VA entitlement. Your Realtor can work with you to find VA and FHA assumption opportunities. 

4. Find a new construction home where the builder has a preferred lender who has purchased a block of money with a forward rate lock commitment.

Oftentimes, new home builders run interest rate specials during certain months. They typically work with a preferred lender who is able to purchase a forward rate lock commitment that expires at a certain time. If a buyer writes a contract where the home would close before the rate lock expires, the builder and lender can extend the favorable interest rate to the buyer. This works best of spec homes that are already built, since they can close quickly. 

5. Ask your Realtor and Lender team what the projections are for interest rates in 2024, and how you can improve your credit score to qualify for the best rates today. 

This seems so simple, but this is truly the best way to know when to buy a home at the best interest rate. We anticipate rates will come down *at some point*, but we also anticipate buyer demand will increase dramatically when we see rates drop, which should inflate pricing. It is impossible to time the market, but it IS possible to make a sound purchase when your personal situation supports that buying a home and investing in the real estate market makes sense for you.