Interest rates are high and housing supply is low, making this a tough housing market but one that’s not impossible to navigate, experts say.
There are still many ways to maximize a budget if you’re a buyer or ensure you earn top dollar and trim your costs if you’re a seller. Strategies include knowing what fees might be negotiable, what home features to invest in, what kind of lender to look for, what types of mortgages are available and what tax benefits there are to selling and buying another home, experts say.
Can I still get a 3% mortgage rate?
Yes, if a seller has a so-called assumable mortgage at a lower rate, you can take it over.
Assumable mortgages are generally those insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA).
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About 12 million, or 23% of, active mortgages are assumable, according to data and technology firm Intercontinental Exchange. Of those, 7.2 million, or 14%, are assumable at interest rates below 4%, which can save buyers thousands of dollars and generate more bids for sellers. Current loan rates hover around 6-7%.
On a $400,000 loan with a 7% interest rate, the monthly principal and interest payment comes out to about $2,660. With a 3% rate, that payment drops to $1,686. That’s nearly a thousand-dollar difference in monthly housing costs.
These deals also don’t require an appraisal, which can save buyers hundreds of dollars.
What are drawbacks of assumable mortgages?
- Assumable mortgages aren’t easy to find. Only some listings advertise them, said Chris Birk, vice president of mortgage insight at Veterans United Home Loans.
If you’re looking in Arizona, Georgia, Colorado, Florida, Illinois and Texas, you can check assumable listings site Roam, which launched last September.
You might have to come up with a hefty down payment. For example, someone has $350,000 remaining on their loan, and they’re selling their home for $450,000. The person assuming the loan would need to pay the homeowner $100,000 at closing for an assumption to make sense. That’s significant for most people, experts note.
Roam also can help buyers secure secondary financing to cover the down payment, typically the difference between the sale price and the mortgage in these deals.
- These deals can be complicated to close. Roam promises sellers a 45-day close, or it’ll pay the seller’s mortgage until closing, said founder and chief executive Raunaq Singh.
- For veterans, their entitlements to purchase the home will remain tied up there until the loan is fully repaid, Birk said. An entitlement is how much the Department of Veterans Affairs will guarantee to repay lenders, typically $36,000 or 25% of the loan amount, in case the borrower defaults and helps determine how much a veteran can borrow before needing a down payment. That means if a veteran must buy a replacement home, entitlements will be curtailed for that purchase because of what’s tied up in the first property, Birk said. If the mortgage goes into foreclosure or short sale after assumption, veterans will lose all their entitlements.
What fees are negotiable in buying and selling a home?
Fees that may be negotiable with a lender, include:
- Application fees
- Origination fees covering the costs of underwriting your loan, which can include processing your loan application, preparing loan documents and reviewing your credit profile
- Fees associated with rate locks that guarantee your rate during the loan process or the purchase of points to lower your interest rate
- Real estate agent commissions. If you’re a seller and don’t want to negotiate your own agent’s commissions, ListWise will connect you with agents willing to work under an incentive-based commission, instead of the current flat percentage structure. Basically, agents agree with you on a minimum price they think they can get for your home. If the sale price exceeds that, agents get paid 0.75% of the final price plus the incentive pay of 20% of each dollar over the agreed price. This approach “focuses attention on what is most important, getting the highest price for your home,” said founder Nic Johnson.
- State and local government recording fees, usually paid for by either the buyer or seller
To get the best rates, comparison shop lenders, experts say.
“Get estimates and see the variance,” said Darren Tooley, senior loan officer at Cornerstone Financial Services. “That gives you some knowledge and basis to say, ‘I’ve got quotes from other lenders and will you work with me?’”
What kind of lender should I hire?
Find a lender who “has a variety of loan products and can coach you to maximize financing with credit improvement, cheaper PMI (private mortgage insurance) options depending on your down payment, paying points or temporary buy downs,” Tooley said.
PMI can be required to buy if your down payment’s less than 20% of the purchase price, and points are a form of prepaid interest you can choose to pay up front in exchange for a lower interest rate and monthly payments.
Temporary buy downs are prepaid interest that gets you a lower interest rate for a short period. “It’s been a way to help bridge the period (before rates fall),” he said. “People can afford a loan at 5-6% even if it’s a year or two and (then, they) refinance.”
FInd a lender:Best mortgage lenders of June 2024
What are tax benefits of selling and buying a home?
- If you sell your primary residence, you can exclude from federal income tax up to $250,000 of the profit as an individual or $500,000 as a couple filing jointly. That applies if you lived there for at least two of the last five years and haven’t sold another home in the last two years, the IRS said.
State tax rules vary, so you need to check local laws, said Mike Zovistoski, partner at professional services firm UHY.
Since home prices have appreciated so much over the last five years, many people selling could probably use this exclusion, he said. If you’re thinking about downsizing, you could sell your house, buy a smaller less expensive home in cash and pocket any difference without paying tax on it.
Also, if you itemize, you can deduct mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt. If you’re married filing separately, the limit drops to $375,000, the IRS said.
What puts the most value on your house?
Anything that adds appeal, Tooley said.
“Landscaping is one of the greatest returns, dollar for dollar,” he said. “Inside, decluttering, fresh paint or a touchup.”
Solar and energy efficiency steps, for which you can receive tax credits, can also add value, Zovistoski said.
Upgraded kitchens and bathrooms are also highly valued, realtors say.
What are the types of mortgages?
The main types of mortgages are:
- Conventional loans, typically used by those with good credit
- Government-backed loans, best for those with lower credit scores and smaller down payments
- Jumbo loans, usually for those with good credit who want to buy expensive homes
- Fixed-rate loans which have fixed interest rates and steady monthly payments
- Adjustable-rate loans which have interest rates that periodically move in line with changes in a specific benchmark
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.