With interest rates high and home supply low, the housing market is tough but not impossible to navigate, experts say.
There are still plenty of ways to make the most of your budget if you’re a buyer, or cut costs while securing the highest profits if you’re a seller. Strategies, experts say, include knowing which fees are negotiable, what home features to invest in, what kind of lender to look for, what types of mortgages are available, and what tax benefits you could get from selling one home and buying another.
Can I still get a 3% mortgage rate?
Yes, if the seller has what’s called an assumeable mortgage with a low interest rate, you can take it on.
Assumable mortgages are generally mortgages that are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA).
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About 12 million active mortgages, or 23%, are available for assumption, according to data and technology firm Intercontinental Exchange. Of those, 7.2 million, or 14%, could be assumed at rates below 4%, saving buyers thousands of dollars and allowing sellers to attract more bids. Current mortgage rates are hovering around 6% to 7%.
On a $400,000 loan with a 7% interest rate, your monthly principal and interest payment would be about $2,660. With a 3% interest rate, your payment would drop to $1,686. That’s a difference of almost $1,000 in your monthly housing costs.
Appraisals aren’t even required on these transactions, saving buyers hundreds of dollars.
What are the disadvantages of an assumer mortgage?
- Finding an assumeable mortgage isn’t easy, with only some listings advertised, said Chris Burke, vice president of mortgage lending at Veterans United Home Loans.
If you’re looking for property in Arizona, Georgia, Colorado, Florida, Illinois or Texas, you might want to check out Roam, an estimated property listing site that launched last September.
You might have to come up with a big down payment. For example, someone has $350,000 left on their mortgage and is trying to sell their house for $450,000. The underwriter would have to pay the homeowner $100,000 at closing, otherwise the underwriting wouldn’t make sense. This is a big problem for most people, experts say.
Roam can also help buyers secure secondary financing to cover their down payment, which is typically the difference between the sales price and the mortgage in these transactions.
- These deals can be complicated to close. Roam promises sellers they have 45 days to close, or it will pay the seller’s mortgage until it does, said Raunaq Singh, founder and chief executive officer.
- For veterans, their right to purchase a home is tied up in it until the loan is paid off in full, Burke said. The entitlement is the amount the VA guarantees to repay the lender if the borrower defaults, usually $36,000 or 25% of the loan amount, and helps determine how much a veteran can borrow before a down payment is required. That means if a veteran has to buy a replacement home, their rights to that purchase are limited because of what’s tied up in the first property, Burke said. If the mortgage goes into foreclosure or short sale after it’s assumed, the veteran loses all their rights.
What fees are negotiable when buying or selling a home?
Some fees you may be able to negotiate with your lender include:
- Application fee
- A fee that covers the costs of underwriting a loan, which includes processing your loan application, preparing your loan documents, and reviewing your credit profile.
- The fee associated with locking in an interest rate or purchasing points to lower an interest rate during the loan process.
- Real estate agent commissions. If you’re a seller and don’t want to negotiate your agent’s commission, ListWise will introduce you to agents who are willing to work on an incentive-based commission instead of the current fixed percentage structure. Essentially, the agent agrees with you on the minimum price they think they can get for your home. If the selling price exceeds that, the agent gets an incentive fee of 0.75% of the final price plus 20% for every dollar over the agreed price. This approach “keeps you focused on what’s most important: selling your house for the highest price,” says founder Nic Johnson.
- State and local government registration fees, usually paid by the buyer or seller.
To get the best rate, experts say you should shop around for lenders.
“Get quotes and see the variances,” says Darren Tooley, senior loan officer at Cornerstone Financial Services. “That way you have the knowledge and basis to ask, ‘I’m getting quotes from other lenders, can you work with me?'”
What type of lender should you hire?
Tooley says to find a lender “who has a variety of loan products and can help you get the most out of your loan by improving your credit score, lower PMI (private mortgage insurance) options based on your down payment, paying points or a temporary buydown.”
If your down payment is less than 20% of the purchase price, you may need to pay PMI on the purchase. Points are a type of prepaid interest that you can pay upfront in exchange for a lower interest rate and monthly payments.
A temporary buydown is interest paid up front to keep interest rates low for a short period of time. “It’s a way to tide you over for a period of time (until interest rates come down),” he said. “People can get a 5% or 6% loan, even if they only borrow for a year or two, and then they’ll refinance.”
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What are the tax benefits of buying and selling a home?
- If you sell your primary residence, you can exempt up to $250,000 of the gain if you’re an individual or $500,000 if you’re married filing jointly from federal income taxes, as long as you’ve lived there for at least two of the past five years and haven’t sold another home in those two years, the IRS said.
Taxes vary from state to state, so you’ll need to check local laws, said Mike Zovistoski, a partner at professional services firm UHY.
He said that because home prices have risen significantly over the past five years, many people looking to sell could take advantage of the exemption. If you’re thinking of downsizing, you could sell your home, use the cash to buy a smaller, less expensive home and take the difference tax-free.
And if you itemize, you can deduct the first $750,000 in mortgage interest you pay during the tax year. For married couples filing separately, the limit drops to $375,000, the IRS said.
What adds the most value to your home?
Anything that adds to the appeal, Tooley said.
“Landscaping is one of the ways you can get the biggest return on your money,” he says. “Indoors, tidy up, repaint or touch things up.”
Tax-credit solar power generation and energy efficiency initiatives also add value, Zovistoski said.
Real estate agents say upgrades to kitchens and bathrooms will also be appreciated.
What types of mortgages are there?
The main types of mortgages are:
- A conventional loan typically used by people with good credit.
- Government-guaranteed loans. Great for those with low credit scores and small down payments.
- Jumbo loans are typically for people with good credit who want to purchase a more expensive home.
- A fixed-rate loan is one that has a fixed interest rate and consistent monthly payments.
- A variable rate loan is one whose interest rate changes periodically in response to changes in a particular benchmark.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Contact her at mjlee@usatoday.com. You can also subscribe to our free Daily Money newsletter, which delivers personal finance tips and business news every Monday-Friday morning.
