When the pandemic led to rock-bottom interest rates, real estate was booming. Now, with high inflation and high, many prospective homebuyers and sellers are trying to figure out what to do.
While buyers are grappling with higher costs, homeowners might also find it challenging to sell their properties in this environment compared to the recent past. The median U.S. home sat on the market for 31 days, according to the latest Redfin data. That's 14 days more on a year-over-year basis.
Plus, homeowners might shy away from selling right now, as they might not necessarily want to then buy a new home in this market and take out a higher-interest mortgage. Many buyers want to wait to see ifbefore making such a big purchase.
But buyers and sellers don't need to put everything on hold until interest rates reverse. In fact, there's no guarantee they'll go back down substantially. By starting now, they take steps to improve their financial situation and position themselves toin the future.
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What homeowners can do
If you're currently a homeowner, take these actions while waiting for mortgage rates to drop:
Renovate your home
Renovating your home could be a good way to both increase your home's value and improve your current living situation. Aor a can give you the cash to cover renovations or remodels.
While interest rates on these loans might be relatively higher now than in the recent past, the amount you'd need to take out could be substantially less than a full mortgage, thereby reducing total interest costs. Plus, adding more value to your home can help you get more money when you eventually sell. Even relatively inexpensive projects can go a long way toward.
Things like painting your home's exterior and improving your landscaping can boost curb appeal, making "an immediate impact on a future buyer's connection to your home," says Scott Griffin, mortgage broker at The Scott Griffin Team. Interior work can also make a difference, he adds. "It's a great time to work on any unfinished home projects and create a fresh feel for the home by replacing electrical outlet covers and light switches to all match and look fresh."
Refinance your mortgage
Despite relatively highat the moment, could still make sense in some cases.
For example, refinancing to a shorter term, such as from a, could potentially lower your interest rate. While the shorter term may increase your monthly payments, you can save money overall and pay off your mortgage faster.
It's also possible that homeowners could refinance more than once as the interest rate environment changes. "In the future, if the interest rate markets invite refinancing into improved terms, they can again lower their monthly out-of-pocket cost through a refinance strategy," Griffin says. Keep in mind that refinancing, but if you carefully look at the total cost of the loan compared to your current situation, it may be worth it.
Rent out your home
If you're not ready to sell your home but want to move, this could be a good time to consider generating income from your home.
Homeowners can "get a HELOC on their current home for what they will need as a down payment and closing costs on the home they want, and then also get pre-qualified for that purchase," says Bret Ceren, associate broker at Platinum Living Realty. "Typically the only extra step needed is that they have a signed lease in place on their current home before closing on their new home, but the tenants don't need to move in until" the homeowner moves out, he adds.
This approach may help you gain some extra cash flow to help offset some of the additional costs of buying a new home at a higher mortgage rate, says Ceren. The specifics, however, depend on the rental amount compared to your mortgage andcosts.
Of course, it's also worth considering if this is a viable option in your area and to account for the extra work. Consider speaking with a trusted advisor or financial professional before you decide.
What buyers can do
Prospective homebuyers also have some options at their disposal. Some potential steps include:
Build up your savings
Using this time to increase savings can help homebuyers afford their desired home and put together a good offer to sellers. Saving more toward a down payment can make buyers "able to qualify for a conventional loan as opposed to going with an FHA or VA loan, which would ultimately be less attractive to sellers," says Alex Caras, broker, Magellan Realty LLC.
Building up your savings can also help when it comes to managing mortgage costs.
"For a lot of people, using that money to buy down their rate when they purchase can be an especially smart move, particularly if they're planning on the property being a long-term hold," says Victor Currie, licensed real estate salesperson at Douglas Elliman Real Estate.
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Prospective homebuyers can also use this period to tackle debt and improve their credit to qualify for competitive mortgage rates and put forward attractive offers to sellers.
"Buyers can pay down debt, reducing their overall debt-to-income ratio. Also, assuming rates will come down within the year, it would make sense to not make any major purchases like a new car or any other expenses that would require taking out a loan," says Caras.
Not only can that help you qualify for a mortgage, but you can potentially increase your, which you might decide to do if rates come down. "Retaining a low monthly debt commitment invites you to qualify for more home purchasing power," says Griffin.
Buy a home anyway and refinance in the future
You don't necessarily have to stay out of the real estate market entirely as you wait to see if interest rates drop. In some cases, it makes sense to still buy a home now, and then refinance when rates are lower.
"There's a lot of conflicting information out there making it hard for people to try to analyze the big picture, so instead just look at what's best for you and your family," says Currie. "We're coming out of an anomaly with the pandemic that threw all the predictable data out the window. If you can afford the property you like in the current market, buy it if you want to. Rates will either go down and you can refinance, or they'll go up and you'll be glad you locked your payments."
Buying before interest rates drop may also help some homebuyers get a better price than if they bought in the future, though that can depend on additional economic conditions. "Because so many are just waiting for rates to drop, we believe it will get even more competitive once they do, likely driving prices even higher," says Ceren. "A mortgage can be refinanced, but the price paid for the home lasts forever."
The bottom line
Both buyers and sellers can take action now to put themselves in a good position to score great interest rates in the future. Predicting interest rate changes can be tricky, but taking these steps can often help you qualify for the most competitive loans, regardless of what's happening with mortgage rates.
That said, some buyers and sellers might be better off not doing much at this point. If you've already renovated and have a good mortgage rate, for instance, and you don't want to rent your home, then you might prefer to stay put until market conditions change. Or, if you've already saved enough toward a down payment and have low debt, you might be okay still renting for a while until you find a great deal on a home.
Your choices depend on several factors like your current financial health and desire to change homes, so it's important to weigh what makes sense for you.
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