What should your strategy be if you’re buying a house in 2023?

A lot of would-be home buyers have been on pause through 2022 due to high interest rates. But as I covered in my article “Should I buy a house now or wait til 2024,” now might be a good time to revisit getting back in the market.

If you’ve made the decision to buy in 2023, maybe you’re wondering what a winning strategy would be for getting back in the game? Let’s say you were planning to buy a place at the end of 2021 and waited, only to find interest rates more than doubling in 2022. How disappointing! Dreams put on hold. The good news is that there are a lot of opportunities now in 2023, if you’re willing to look. And, you might want to consider some financing strategies that are more appropriate for the new landscape.

Think out of the box on your home financing

Yes, you could get a 30 year fixed mortgage, like you may have planned on before interest rates went up. But, there are strategies to mitigate the higher mortgage rates which you might also want to consider. Depending on your financial profile and your goals, the following points might be strategies you’d want to consider.

1. Reduce your interest payments through a shorter financing period

Higher mortgage interest rates means more of your monthly mortgage payment is going towards paying interest to the bank, versus paying down your principal, which pays down your loan. A strategy that you could use to reduce the amount of interest you are paying is by getting a shorter term loan, like a 15 year or 20 year mortgage. Yes, your mortgage payments would be higher than with a longer term loan. But if you have the money to qualify and make it happen, it can save you a lot of money in this era of higher interest rates.

2. Increase your down payment in order to lower your monthly mortgage payment

If you put more money down that means your mortgage loan amount is smaller. A smaller mortgage loan amount means smaller monthly payments. You also have more equity in your home. If you have the money on hand, you might consider this strategy in order to reduce the monthly cost of your mortgage.

3. Consider an adjustable rate mortgage to lower your interest rate

Adjustable rate mortgages got a bad rap during the Great Recession because people got loans they couldn’t understand and not necessarily afford. But these days, in order to get an adjustable rate mortgage (ARM), you have to qualify at the fully indexed rate, minimizing the risk. This also shuts out a lot of home buyers from taking advantage of ARMs.

If you are considering an ARM, it’s good to understand how adjustable rate mortgages work (see this video). And, be aware of the risk that if your income goes down, or some other issue evolves so that you won’t be able to qualify for a refinance, you’d be possibly at the mercy of increasing rates. These are important considerations.

But, a lot of mortgage industry people choose adjustable rate mortgages due to the benefits it provides – lower monthly rates.

4. Pay a point in exchange for a lower interest rate

Buying a point is a confusing topic, so I made an explainer video about what exactly buying a point means and how to know if you should buy one.

The gist of it is, you pay 1% of the loan amount upfront at closing in order to enjoy an approximately 0.25% decrease in your mortgage interest rate. I have an article that lays out the return on investment considerations for buying a point which is definitely worth a read if you are considering this strategy. You can even buy 1/2 a point, or more than one point, depending on what makes the most sense for you. In any case, buying a point is a viable strategy to offset the effects of higher interest rates these days.

Look for value properties

There has been definite softening in the housing market. It varies region by region. If you are house hunting now, it pays to do some research into areas and appreciation rates, and keep your eye on the data because there are a lot of price cuts out there. Especially with houses that have been sitting on the market for 60 days or more.

Buying a value property just means that you will have a bigger upside in terms of the equity you gain as the house appreciates. You can use my guide to get a sense of home appreciation.

You also want to be careful to buy a house that doesn’t have too many unexpected costs. A smart inspection strategy is needed. You can look to buy in an area that’s in demand, but not the house that everyone else is clamoring to buy.

Especially if you are buying in a new area, find a very knowledgeable real estate agent with regional expertise to help you sniff out the best deals.