After hitting a rate of nearly 7.5 percent in November, it appears that mortgage rates might be softening as we head into 2023.
Most people think that the Federal Reserve directly sets mortgage rates, which isn’t exactly true. While the Fed can change its Fed Funds Rate and a few other rates, it doesn’t set consumer mortgage rates.
Assuming inflation eases in the next year, mortgage rates will fall. But what if you want to buy a house now? There are a couple of tools that could help get you through the next year or two while the market recalibrates.
2-1 rate buy down
Given that the market has slowed down, most sellers are offering concessions, like a temporary rate buy down, meaning that you could get a rate two percent lower than your agreed upon rate for the first year you own the home and a one percent rate reduction the second year. For example, if your base rate is 6.5%, for the first year of your mortgage you’d have a 4.5% rate and for the second year a 5.5% rate, before bouncing back up to the original rate from year three through the end of the loan term. The hope is that mortgage rates decline within the next two years so you can refinance to a lower rate before it resets in year three.
Some homeowners are sitting on loans with extremely low mortgage rates and there may be an opportunity to transfer their loan into your name and let you take over their payments. There are conditions that have to be met and if you don’t have the cash on hand, you may have to take out a loan to cover the extra equity the seller has in their home that they will want to be compensated for.
See a loan expert
While as a Realtor, I’ve seen some of these options used, it’s a good idea that you consult with a mortgage loan officer to figure out which works best for you. The rate buy-down and the loan assumption process could be answers that allow you to buy a home and save money while waiting for interest rates to fall. But before going down that path, it’s a good idea to consult with a mortgage loan officer to help you understand your options.