Wait, I can still get a low interest rate?

Yes, you read that right. You can STILL get a low interest rate. However, we have to get a little creative to get there. To make it possible, you’ll either need to buy down the interest rate, have the seller pay for a temporary buydown of the interest rate, get a floating interest rate, use seller financing, or you can assume the mortgage that the seller has (take over the existing mortgage). A low interest rate is at the heart of what keeps a mortgage payment affordable. Therefore, the higher the loan amount the more important it is to get a lower interest rate.

Buying down the rate

Buying down the rate or “paying points” means that you will use your money up front to get a lower interest rate. In turn, this increases your closing costs/initial down payment. In exchange, you get a lower monthly payment for the life of your mortgage. Typically, it’s been that every $3,000 or so gets you a .25% reduction, though you should verify with your lender as it can vary and is subject to change. To summarize, if you have extra cash for a down payment you can permanently buy down the interest rate for the life of the loan.

2-1 buy down. Have the seller pay for your low interest rate!

You can get the seller to pay for your temporarily low interest rate with what’s called a 2-1 buydown. The way it works is when you submit an offer, you have the seller pay for the rate buy down with a closing cost credit. Keep in mind, that credit can only be used for the rate buy down. You cannot use it for anything else. The “2” in “2-1” stands for 2% and the “1” stands for 1 year. So essentially, you could get a full 2% smaller interest rate for a full year, or even up to 2 full years but the closing credit would need to be much higher. Those who pursue this path often do so with the plan to refinance once interest rates cool. It can be a good way to get temporary relief in this odd market, especially considering it doesn’t cost you money out of pocket and can be less expensive in the short run than buying down the rate by “paying points.”

Adjustable interest rates

Adjustable interest rates, like a 2-1 buy down, will give you a temporarily low interest rate. However, it usually has a longer term for that low interest rate, usually anywhere from 5-10 years. This is great in the sense that you get locked in to a lower mortgage payment for a good period of time. However, when that fixed period is over your rate will change to whatever the market rate is. This means that there is uncertainty because when you purchase the home we do not know where interest rates will be by the time this period expires. It’s typically only a good idea to take on a mortgage like this if you have a good stream of income and have a game plan on what to do if rates end up being higher. Otherwise, it can be risky as your monthly payment could skyrocket for the rest of the loan depending on where rates are at. I reiterate because it’s important: if you pursue this option, put together a good game plan in case rates are higher by the end of the low interest period.

Seller financing

Not all mortgages have to be through a bank. If a seller owns the home free and clear (no mortgage or liens) then they can actually offer you the property and you pay them back over time. You would need to negotiate with them on the interest rate, down payment, and length of the loan. Keep in mind that not all sellers will want to pursue this option, even if they own the home free and clear. It can depend on their risk tolerance and how badly they need the money from the proceeds of the sale. Therefore, it’s best to ask sellers before seeing the home if they would consider seller financing. Some sellers will even mention they are open to seller financing up front, which tend to be the best homes to pursue. It would also be wise to target homes that have been on the market for a few weeks or longer as these sellers would be more incentivized to offer seller financing.

Assuming a seller’s mortgage

This one is fun and can get you the lowest possible rate. While these haven’t been popular for mortgages in quite some time, they are starting to gain attention because you can actually get the same rate the seller has. So, if the seller refinanced/bought and got that sweet 2.75% interest rate it can be transferred to you. If it seems to good to be true that’s because it partly is. Yes, if you find a seller with a great rate you can benefit, but keep in mind this is not a new loan. You take over the existing loan. This means if the seller’s mortgage is $200,000 and you agree to buy the home from them for $300,000, then you will have to have a down payment of $100,000 to cover the difference between the purchase price and the loan amount. As a result, to go this route you will either need to be lucky to find a seller with a low interest rate and a loan amount close to the purchase price of the home, or get ready to come to closing with a large sum of money. For those with deep pockets looking to get a low interest rate, this is a great opportunity.

Are you looking to buy or sell a home?

Realtor Steven Johnson would love to hear from you! Steven is an experienced agent who covers all towns from Chicago to Southern Wisconsin. He has been in the business for over 8 years and works with both buyers and sellers. Give Steven a call today to get started on your home buying or selling journey! (847) 525-6121

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