Today, I want to talk about the same difference between a higher interest rate in a buyer's market as a lower interest rate in a seller's market. All of this is based on demand.
In a seller's market, you're going to have a multiple offer, multiple bid situation, which means when make an offer on a home with an asking price of $285,000 (if it's an extreme seller's market that means there's more demand for homes than there is home inventory availability) and then there's 30 people making an offer on that home, the bid's naturally going to go up to where it could potentially sell for $300,000.
In a seller’s market, the interest rates are a little bit lower, which is why the demand for housing is so high. Because the interest rates are low. If you flip that upside down to a buyer's market, then the buyer has a little bit more negotiating power. This is because the demand for homes lower and the interest rates are higher. As a result, fewer people are buying or less motivated to purchase a home.
The biggest difference between a buyer's market and a seller's market is this:
· In a seller's market, the seller is much less likely to cover the closing costs for the buyer
· In a buyer's market the buyer is much more likely to get the seller to cover some or all of their closing costs
Typical closing costs are going to be somewhere between 2% and 4% of the purchase price, depending on the area that you're buying in.
In a seller's market where they're not going to cover any closing costs let's use the scenario of a $300,000 home with 20% down payment. The closing costs are estimated at 2.4% of the purchase price. $300,000 * 2.4% = $7,200 in closing costs that you, as the buyer, have to pay because the seller doesn't have to.
In a buyer's market the seller is much more willing to cover that $7,200 in closing costs.
Remember that number $7,200. That's to cover the closing costs that's with a 7% interest rate in a buyer’s market.
In a seller's market, with a 5% interest rate, that monthly payment would be around $386 less. If you take $309 per month and you multiply that by 2 years (24 months), that equals $7,416.
With all of that said, check out this comparison:
Situation – Seller’s Market
Home price: $300,000
Seller covers $0 closing costs
Interest rate: 5%
Monthly principal and interest payment: $1,288
Situation – Buyer’s Market
Home price: $300,000
Seller covers $7,200 closing costs (2.4% of purchase price)
Interest rate: 7%
Monthly principal and interest payment: $1,597
In a seller's market where they're not going to cover any closing costs let's use the scenario of a $300,000 home with 20% down payment. The closing costs are estimated at 2.4% of the purchase price. $300,000 * 2.4% = $7,200 in closing costs that you, as the buyer, have to pay because the seller doesn't have to.
In a buyer's market the seller is much more willing to cover that $7,200 in closing costs.
Remember that number $7,200. That's to cover the closing costs that's with a 7% interest rate in a buyer’s market.
In a seller's market, with a 5% interest rate, that monthly payment would be around $386 less. If you take $309 per month and you multiply that by 2 years (24 months), that equals $7,416.
My point is, right now we're shifting into a buyer's market. As a buyer, you're much more likely to get the seller to cover your closing costs. Even though the interest rates are a bit higher, you're realizing that $7,200 savings up front, at closing, immediately.
Industry experts claim that the interest rates are going to go back down. If you buy a house right now for $300,000 at 7%, even though the monthly payment is $300 higher, you will realize a $7,200 in savings at closing because the seller covered all of your closing costs.
If the interest rates drop (and we're confident that they will) and you refinance your home within 2 years, not only have you realized the $7,200 in savings from having the seller cover your closing costs, you're going to realize an additional savings over the life of the loan after you reduce your interest rate through a refinance. Think about that!
I'd love to hear your thoughts. If you have questions, you can always give me a call or visit me at terryroberts.com hope you have a great day!
Terry Roberts, USMC Veteran Sr. Mortgage Broker NMLS 397987 www.TerryRoberts.com
E Mortgage Capital
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