4 Hacks For High Interest Rates
Are you ready to fire your landlord? Or upsize? Or downsize? Or relocate? Are high interest rates holding you back? I’ve got four hacks to help.
Except I’m an overachiever and added five bonus hacks. Your opportunities await!
Before we launch in, let’s just take a minute to talk about rates and why they fluctuate.
Mortgage loans, like any other loan, are loans made and priced based on perceived risks. The lender needs a certain comfort level that the lender will get a fair return on its money over the course of the loan. Fun fact! 30-year rates aren’t really priced on 30-year time horizons. They are priced on the statistically average time borrowers own their properties.
OK, that’s a slight digression, but as you consider each of the hacks below, keep in mind that lenders will be weighing risks related to you personally, the housing market, our domestic economy and the global economy. Whew! It’s not easy being a lender.
With that lens in mind, here are 4+5 ideas for helping you combat our current high rates.
1. Adjustable Rate Mortgages
ARMs got such a bad rap during the Great Recession in 2008. People embraced them for their lower rates but didn’t understand them and got stung when rates bumped up. Personally, I’m a fan, but you absolutely need to understand what you’re getting into.
As I wrote previously on this blog, my husband and I had an ARM 20 years ago and I randomly found the note and read the terms. Our particular ARM was a 10-year ARM and our rate was fixed for that period. That is, we got all the benefits of the lower rate FIXED for 10 years.
Even when rates were set to adjust, they would adjust by a contractually agreed upon rate, and I was pleasantly surprised to see that the bumps were relatively manageable. More importantly, we could plan our family finances based on the loan contract.
Did our rates go up? We didn’t stick around that long. When rates improved, we refinanced into better terms.
Will you be able to refinance into better terms? There are no promises, but historically, our economy and mortgage rates have been cyclical. If you’re paying attention, you will likely find opportunities to finance out of the loan. Your worst case scenario is periodic bumps you can plan for and/or you can sell the property.
By the way, your adjustable rate can go down, too.
Because you, the borrower, are taking some of the future risk off the lender, ARMs are usually priced lower (and sometimes significantly lower) than fixed rate mortgages, making this a nice hack.
2. Rate Buy Downs
Some lenders will let you buy down the rate by paying points. This means you pay some amount of money upfront to lower your rate over the life of your loan. Each point costs 1% of your mortgage amount and typically lowers the rate by .25% for the life of the loan. Please note that lenders vary on the exact mechanics, so ask lots of questions
Whether this strategy is right for you depends on how long you plan to own the property. It’s all a mathematical calculation and your lender can help you run the numbers. Or maybe it’s not a mathematical calculation. Maybe you just need lower rates for some period of time and it makes sense to trade off a few dollars at the front end, even if you only have a five year ownership plan.
Or, ask me about five year plans. My family is enjoying its 20th year in our five-year home.
Pro tip! Sellers can pay your points if they want to do that rather than take a price cut. Not every seller will understand this strategy or see the benefit to them. This strategy requires a skilled agent to negotiate on your behalf.
3. Loans From Friends & Family
This strategy offers lots of opportunity for creativity. What you need for this hack is anybody who wants to earn more money with you than they will earn from a CD or savings account. As long as the rate you pay them is more than they can otherwise receive someplace else, and is lower than mortgage rates you would otherwise pay, this is financial win-win for all.
Keep in mind that best practices dictate you both sign a written agreement laying out your express expectations and remedies if the other fails to keep their end of the bargain.
A loan like this could be deployed in a number of ways, including buying points to reduce your rate and monthly payment, a bigger down payment so you can take a smaller loan, and/or replacing your mortgage lender altogether.
4. Buy A Smaller House
This might be my favorite option of all four. This option contemplates buying a smaller house on a bigger lot to expand later. You aren’t exactly hacking your rate, but you are taking on a smaller loan than you might otherwise have been planning.
Why is this my favorite right now? It’s an investment in locking down a future opportunity to add on to your home and it’s a unique opportunity at this exact moment in time.
Generally you would be competing against developers for these smaller houses, but guess what? They are having their own financing challenges right now.
Right this minute is a unique opportunity to pick up one of these little house with less competition, but this is a limited time opportunity until other end-users like yourself see the opportunity and developers come back into the market.
And another benefit to this approach is that if you never seem to get around to adding on, down the road you can upsize into another property and hold this one as a rental. Look at you, land baron!
Bonus Hacks
Buy a duplex with another buyer in partnership with a right to buy each other out under certain circumstances. You are literally buying half a property at half the price. This is a great starter strategy.
Buy a property with an ADU and add a tenant. Single family homes appreciate faster than condos and duplexes in our beach cities. With the right lot size, you can add an ADU that is pretty big and get a tidy rent for the unit. If you need to build, the city of LA has multiple pre-approved plans that expedite permitting. California state law is also currently very ADU-friendly. This is also a great alternative for families with grown children or aging parents.
Take a roommate. You finally grew up and thought you were done with roommates, right? Why not suck up for a time and bring somebody in to help pay the mortgage?
Seller financing. This is an idea we haven’t seen here in the beach cities in the 11 years I’ve been selling real estate, but I remember it being a thing in the 80’s. According to a client I spoke with recently, it still happens in Florida. I’m no expert on tax law, but I do wonder if partial financing might be a way to defer some tax pain on the seller’s capital gains. This strategy needs more research, but is an option that deserves a place on this list. You never know, in any event, if there might be a reason a seller doesn’t want or need all the cash from the sale right now.
Take a shorter loan. Your today payments will be higher, but your interest expense over the life of the loan could be lower versus a 30-year loan that you keep for 30 years.
Where To Start
All of these hacks start with a lender to crunch numbers with you. Not until you find out what your mortgage starting point looks like will you be able to start evaluating potential hacks and opportunities. Equally important is to sign on with a buyer-focused agent who is creative and understands your options. I just happen to know the right people in both categories.
So where do you want to start? How about scheduling some no obligation time on my calendar to strategize? Find my calendar at this link and pick a time that works for you.