Many home buyers and sellers make decisions based on changes in mortgage rates. Naturally, most people put off their plans when market conditions are unfavorable. However, playing the waiting game is unrealistic for people who must move.
Lease agreement expiration, job relocation, family milestones and a desire for a lifestyle upgrade can put pressure on you to change addresses before mortgage rates drop low enough to your liking. If you’re in this situation, navigating the market successfully requires understanding its effects and exploring your strategic options.
How High Mortgage Rates Affect Buyers and Sellers
In a high-rate environment, the financial pressures on buyers and sellers differ fundamentally. For buyers, the primary challenge is affordability and purchasing power. For sellers, it’s navigating a market with dampened demand.
As a homebuyer, taking out a high-interest home loan means shouldering higher monthly mortgage payments. A larger bill eats up a bigger portion of your monthly budget. It limits your capacity to repay, as the National Association of REALTORS® considers anything more than 25% of your income unaffordable. A higher monthly mortgage payment shrinks your discretionary income — the money left after taxes, utilities and financial obligations. It also raises the amount of cash reserves the lender needs to see to feel confident enough to approve your application.
As a seller, higher mortgage rates dampen housing demand. Buyers have more negotiating power when sellers outnumber them, as weak competition reduces the need to bid too much on a property.
What to Do When Planning to Buy a House
If you must move and want to buy a house, here are your options.
Sublease Your Unit
Subletting is an arrangement in which you let another person lease the unit you’re renting after you’ve vacated it and before your contract with your landlord expires.
This setup entails a written agreement between you and the subtenant that specifies which party is responsible for what during the sublet period and the prerequisites. The master lease terms also apply to the new renter, so attach a copy to inform the subtenant about them.
If the master lease permits you to use a subtenant, run thorough background checks on candidates. The subtenant pays you rent, and then you pay your landlord. Your landlord expects you to pay the full amount, regardless of whether the subtenant pays you. It’s in your best interests to collect a security deposit to safeguard against unpaid rent and damages. This refundable sum incentivizes the subtenant to behave accordingly to avoid losing it.
Buy Now With a Plan to Refinance
If renting again isn’t an option, you can proceed with buying a home now and plan to refinance later. This strategy means you accept a higher initial rate to get into your desired home, with the goal of refinancing to a lower rate once the market shifts.
Be sure to discuss prepayment penalties with your lender, as this can affect your ability to refinance early. Furthermore, you can still work to lower your specific offer. Lenders look favorably on high credit scores and substantial down payments, which can give you leverage to secure a better rate than the market average.
What to Do When Planning to Sell a House
If you need to move out of your house and want to sell it, consider lowering your asking price to make your house more appealing and stand out from other listings. Offering a seller concession can attract more interested buyers. Agreeing to pay some of the closing costs gives the buyer more cash to put down, increasing the chances of mortgage approval by borrowing a smaller amount.
Cash-only buyers may gravitate toward your listing if you price your property low enough. These buyers don’t rely on mortgage lenders for funds, rendering rising rates irrelevant and enabling them to close the deal faster.
Making Your Move in Any Market
Record-high mortgage rates make it challenging to buy or sell a house when moving, but not impossible. Be strategic, set your expectations accordingly and play your cards right to make the most out of this less-than-ideal situation.
