Schaub Team Blog

Financing Options When Interest Rates are High

Posted by Jamie Jewell on Nov 09 , 2023 - 07:53 am

Interest rates have you in a holding pattern? Lenders and Sellers are getting creative and presenting options that may keep you in the buyer’s seat.

Assumable Mortgage

A plan that allows the seller to transfer an outstanding mortgage with its current terms to a buyer is called an assumable mortgage. Assumable MortgageAccording to Investopia, “By assuming the previous owner’s remaining debt, the buyer can avoid obtaining their own mortgage.” While buyers still must qualify for the mortgage to assume it, an assumable mortgage can be attractive to a buyer who takes on the existing loan at a lower interest rate.

Perhaps the best opportunity to consider an assumable mortgage is when the seller’s equity in the home is low. As an example, if the sales price of a home is $475,000 and the mortgage balance is $410,000, the buyer needs to come up with the difference of $65,000 to the seller. If, however, there is a large amount of equity in the house, the buyer could be faced with making up a much larger difference which can often require them to secure a second mortgage.

Most popular types of mortgages are assumable, but the buyer must meet specific requirements and obtain approval from the existing mortgage backer. Approval must be obtained by the original mortgage lender first. If approved, the property title is transferred to the buyer at closing. But, that doesn’t automatically release the seller from liability in the event the buyer defaults. To avoid that, the seller must release liability in writing at the same time the mortgage is assumed, and the lender must release the seller from all liability associated with that loan.

Sellers who are having a difficult time getting their home under contract may wish to check with their mortgage lender to see if this would be a good alternative to offer a prospective buyer.


Mortgage Buydowns

Mortgage BuydownAnother financial tool buyers may wish to consider is a mortgage buydown. Mortgage buydowns provide reduced interest rates on a mortgage for a predetermined term to help borrowers manage their initial payments more comfortably. The 3-2-1 and 2-1 buydowns have become more common as interest rates have continued to rise.

Here’s how it works:

3-2-1 Buydown

  • First Year: The interest rate is reduced by 3% from the prevailing market rate (when you locked in the mortgage).
  • Second Year: The rate is reduced by 2% below market rate.
  • Third Year: The rate is reduced by 1% below market rate.
  • Fourth Year and Beyond: The interest rate stabilizes at the market rate.

2-1 Buydown

  • First Year: The interest rate is reduced by 2% below the market rate.
  • Second Year: The rate remains 1% below the market rates.
  • Third Year and Beyond: The interest rate stabilizes at the market rate.

Sellers who are anxious to sell their home may opt to assist a potential buyer with a buydown option because buydowns may come with additional fees or upfront costs. “We’ve seen temporary buydowns help several buyers and sellers come together, giving the seller a price they are happy with and the buyer a payment they are comfortable making,” shares Todd Jarrold, a local consultant with Caliber Home Loans.

A buydown may also be attractive to buyers who:

  1. Anticipate their income to increase within a few years.
  2. Want to invest in upgrades to the home during the period of lower mortgage payments.
  3. Plan to refinance prior to the end of the buydown period.

Be sure to evaluate the current market conditions, your long-term financial outlook and consult with a trusted mortgage professional to determine which option best aligns with your goals.

For more information on these options and others provided by lenders, feel free to contact our licensed agents with Schaub Team Premier Realty