Why Houston homebuyers shouldn’t be scared of high interest rates

“Two years ago, we were waiving inspections or keeping inspections very short,” Houston realtor Molly McGinty-Slagle says. “Buyers were having to accept things about the home that they didn’t really like, but they wanted a home so bad.”

The rise of interest rates and inflation in the summer of 2022 completely stalled real estate in some areas, while here in Houston it slowed to a more manageable rate.

My recent divorce resulted in my need to shop for a new home twice in the span of six months. I experienced a completely different market in May compared to December. In May, we had to offer more than the listing price for a home that we had seen once at an open house. When I shopped in December, I visited multiple houses that had been on the market for months.

The demand may have dropped, but high-interest rates are scaring some buyers away as inflation continues to keep prices high. Still, real estate experts are saying now is the time to buy as 2023 presents less competition.

“We’re not just frantically writing offers because it’s a home that meets most of our criteria,” McGinty-Slagle says.

McGinty-Slagle recalls a recent conversation with a homebuyer who decided to return to the house-hunting ring after an overwhelming search in 2022. Now, he is experiencing a more relaxed process.

“He’s maybe paying a little bit more in interest,” McGinty-Slagle says. “But now he is able to select a home he truly loves and not have to go into a contract with less due diligence.”

According to Bankrate , the current average rate for a 30-year-fixed mortgage on January 20 is 6.46 percent. That is a decrease from how high it has been, but it’s a disappointment to those who saw the bottom-of-the-barrel interest rates during the past two years.

“I’ve done this for almost 20 years,” mortgage broker Renee Morton says. “I’ve seen the market go up and down. I lived through 2008 when the market crashed. The truth is that interest rates at five percent are actually about where they’re supposed to be.”

Morton goes on to explain that interest rates for home loans should normally be in the high four percent to low five percent in order to stabilize the economy. The pandemic’s artificial suppression in an attempt to boost the economy led to staggeringly low-interest rates in 2021 and 2022, but buyers may never see rates that low again.

“So many people think, ‘I’m going to wait until rates drop into the twos again,'” Morton says. “Well, that’s probably not going to happen unless we go into a pandemic again and no one wants that.”

When I purchased the home in June, our interest rate was locked in at 4.25 percent. This past month, I was given an initial interest rate of 6.125 percent. Sure, I did not feel forced into making a quick decision as I had before, but I worried about making high mortgage payments with that interest rate. Thankfully, there are options for homebuyers who want or need to find a home now but are balking at high-interest rates.

Morton suggests an interest rate buydown—the method I utilized—because it does not force a seller to substantially drop the listing price which in turn affects the value of the neighboring homes. Instead, the seller buys down a temporary lower interest rate for the homebuyers which helps save money long-term. Wait, what?

An interest rate buydown, such as Morton’s preferred 2-1 buydown, means that the seller is paying a sum of money to buy a lower interest rate for the buyer for two years.

“I’ll give you an example,” Morton says. “I had someone that had a $700,000 listing and the realtor wanted to lower it by $50,000. It was only going to make a $100-a-month difference in the person’s mortgage payment.  But if they paid $14,000 over instead and kept the sales price at $700,000 and didn’t lower it, they would have brought the rate down for the borrower for two years.”

Basically, the seller purchases a 2-1 buydown rate for the buyer. This in turn lowered the buyer’s interest rate to 3.99 percent for the first year, 4.99 percent for the second year and in the third year, the rate will return to what the market interest rate was when the home was purchased. Morton says that the buyer saved up to $700 a month in their mortgage payment for that first year thanks to the 2-1 buydown.

The interest rate will return to the original number at the end of the two years, but buyers tend to refinance at that point. Morton says no matter if a buyer is using a rate buydown or not, she will refinance borrowers when interest rates drop. Refinancing is when a buyer’s credit is reexamined to determine new loan terms, such as a lower interest rate or monthly payment.

If you are still confused, you are not alone. My loan officer has made personal videos of every step in the financing process and often calls or texts to check in and make sure I understand the documents I am receiving. Morton and any mortgage broker worth their salt will provide documentation that explains the buydown process using the numbers specifically for your home purchase.

“My goal is to make sure that no matter what [homebuyers] ask me, I’m able to explain it in a way that they can understand,” Morton says.

Additional tips that Morton and McGinty-Slagle shared for homebuyers include:

• Ask friends or family for realtor recommendations, or utilize Google business reviews
• Interview multiple realtors before choosing one
• Create a list of what is most important to you in choosing a home
• Keep in mind additional expenditures that home purchasing can include, such as a new hot water heater
• Older homes are likely to have a lower property tax than newer ones