Whether you’re a first-time homebuyer, buying your second, or investing, the market has changed substantially in the past few years, making buying a home more challenging than ever. Today, we’ll break down some tactics you can use to take control of your own destiny and make purchasing a home more affordable.
Most people’s perception is that home prices are going up only…. They are right, but there are different strategies anyone can use to help offset the increasing cost of buying a home. The ones we are going to cover today include how you file your taxes, buying down your interest rate when possible, buying when mortgage rates are higher (yes, when they are higher), making sure you have a credit score as high as possible, and considering buying a multi-unit property to help pay your mortgage down quicker.
Changing How You File Your Taxes to Get a Larger Refund
We recently broke down tax deductions and how they work, but in this market with higher rates, itemizing taxes can save you thousands over the standard deduction.
As a homeowner, you can itemize your deductions to get a larger refund or lower your taxable income by potentially thousands of dollars. The federal tax code allows all taxpayers to use certain costs and donations to reduce their taxable income. Two ways to do this are to use a government-defined “standard deduction” or to itemize certain allowable costs and aggregate those into “itemized deductions.”
When you itemize, real estate costs like mortgage interest, real estate taxes, personal property taxes, and state taxes can be used. When mortgage interest rates are higher, this method of filing taxes has become more popular.
Buy When Mortgage Rates are Higher —Yes, Higher
According to Zillow, housing inventory has increased by 10%, but it has still fallen 50% since 2019. There are no signs that the supply-demand challenge driving home prices will soon be solved. So, the best window you can hope for is to buy when interest rates are up, and demand might be slowing down.
Would you rather buy a home for $350,000 when rates are 7% or $400,000 when rates are at 5%? Because of the historical rise in home values, you can save more by buying when the houses are cheaper, even if the rates are higher. You can always refinance to a lower rate when you own a home if your mortgage rate is too high, but you can’t get your money back when you overbid for a home.
Another upside to buying when rates are higher is having less competition in the market. Higher interest rates can deter people from shopping for a home and can, therefore, give you an edge in that you will have fewer competing offers. This can also help you with the ability to negotiate things like a seller-paid buydown.
Negotiate for a Seller-Paid Buydown
Many people may have heard the term “mortgage points” but may be unsure what they are or how they work. We’ll explain what they are and how you can use them to lower (buy down) your mortgage interest rate.
A mortgage point is a fee a borrower pays upfront to a lender in exchange for a lower interest rate on their home loan, essentially acting as prepaid interest; each point typically costs 1% of the loan amount, meaning you can “buy down” your interest rate by paying a certain number of points at closing.
If you are interested in a property and fortunate enough to negotiate, it might be in your best interest to ask for a seller-paid buydown instead of a price reduction. If you are financing a home with a mortgage, a seller-paid buydown lowers the buyer’s mortgage payment much more effectively than dropping the contract price.
This comparison is based on a 701 credit score, 20% down payment, 30-year term, 7.125% interest rate with an APR of 7.238%, and a 5.990% interest rate with an APR of 6.362%. The information provided by Homestead Financial Mortgage is for educational purposes only. Products and interest rates are subject to change at any time due to fluctuating market conditions. Actual rates available may vary based on a number of factors, including credit rating, down payment, loan type, and documentation provided.
Get Your Credit Score as High as Possible
While the minimum credit score to get a mortgage is 620, you can get a better rate by increasing your credit score. There is a difference between a good and a great credit score; we break that down here. The lowest rates in the market happen when your score is over 780.
You can improve your credit score by paying your bills on time and, as your score increases, managing your revolving debt effectively. This means keeping a low balance-to-credit limit ratio and paying the minimum payment on time.
If you are thinking about buying and wondering where your credit stands, it’s best to contact one of our loan advisors. They can get you pre-approved and walk you through the steps you can take to improve your score and keep it high while you are looking for a home.
House Hacking
House hacking with a multi-unit property is a savvy strategy for paying down a mortgage efficiently. By purchasing a duplex, triplex, or fourplex, the owner can live in one unit while renting out the others. The rental income generated from tenants can cover a significant portion—or even the entirety—of the monthly mortgage payment, reducing the owner’s financial burden. Additionally, this approach allows the owner to build equity faster while benefiting from potential tax advantages and creating a pathway toward long-term wealth through real estate investment. Our loan officers have had experience helping customers with this strategy with great success.
Home affordability will continue to be challenging for at least the next 10 years. Home inventory is not likely to increase, and home prices historically will continue to rise. But it’s important to remember that even with higher rates, now might still be the best time to buy a home. By using these techniques, you can make buying a home as efficient as the market will allow. Give us a call so we can walk you through the process, get you pre-approved, and get you on your way to finding your dream home.