Your Colorado Springs Life & Home

Navigating Rising Interest Rates in Colorado Springs Real Estate

• Lori Thompson • Episode 2

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How Do Rising Interest Rates Affect Home Affordability?

Rising interest rates have dramatically transformed the Colorado Springs real estate landscape, but contrary to what many believe, this shift brings unexpected advantages for savvy homebuyers. After enduring a frenzied seller's market with multiple offers and prices soaring well above appraisals, we've now entered a more balanced environment where buyers can breathe, think, and negotiate.

As we explore in this episode, today's buyers face a fascinating trade-off: higher monthly payments but significantly less competition. The old real estate wisdom "marry the house, date the rate" has never been more relevant – especially for military families using VA loans who can access streamlined refinancing options when rates eventually decrease. We break down how new construction incentives like 2-1 buydowns work, potentially lowering your rate by 2% the first year and 1% the second year before settling at the market rate. This structure aligns perfectly with expected BAH increases or career advancements many military families experience.

Colorado Springs holds a special place in military assignments, ranking second only to Hawaii in desirability. This creates unique investment opportunities as many service members choose to keep their properties when transferred, establishing rental income streams with plans to return upon retirement. We examine the complete financial picture beyond just the interest rate – including how property taxes differ between new and established neighborhoods, additional costs in new construction that model homes don't reveal, and the importance of maintaining financial flexibility after purchasing. Remember, most homeowners stay in their properties just 5-7 years, not the full 30-year mortgage term, making the right property at a manageable payment far more important than waiting for "perfect" interest rates. 

Ready to explore your options? Contact Lori, your lifetime realtor who's been guiding Colorado Springs homebuyers through interest rate cycles for over 40 years.

To learn more about RE/MAX Properties Inc. visit:
https://www.LoriThompson.REMAX.com
RE/MAX Properties Inc.
Colorado Springs
719-332-1807

Speaker 1:

Welcome to your Colorado Springs life and home, where real estate meets real talk and maybe a little too much coffee. Hosted by REMAX Properties, licensed realtor, broker and top producer Lori Thompson, a local legend who's been helping military families and civilians buy and sell homes for over 40 years. Whether you're PCSing, upsizing, downsizing or just daydreaming, lori's got you covered. Why? Because she's your lifetime realtor and she actually answers her phone.

Speaker 3:

Imagine that interest rates climbing, many buyers are wondering how does this impact their ability to afford a home? We're breaking down what rising rates mean for mortgages and monthly payments and overall buying power. Welcome back everyone. I'm millie m, co-host producer in the studio with remax properties, licensed realtor and broker laurie Hi Lori how are you?

Speaker 2:

Oh, I'm doing good today. How are you doing?

Speaker 3:

I'm doing amazing, so excited to talk about this topic. Interest rates has been a hot topic lately and I can't wait to hear your insights on how they're affecting today's market. So how do rising interest rates affect home affordability?

Speaker 2:

You know, it's kind of interesting because it's a mixed bag. When the interest rates were super low, it became such a competitive market that it pushed a lot of buyers out of the market because we would get multiple offers with ridiculous things added to them, like hey, if the appraisal comes in low, we'll pay up to $15,000, $20,000 above appraisal. Now keep in mind, especially if you're using a VA loan, the VA will loan you up to the purchase price as long as it appraises. If the appraisal comes in lower, you've got to come out of pocket. So we had buyers whose parents and grandparents were helping them or else they'd have to drain their savings. And it was a market I actually did not enjoy, only because you had to look at a house, make an instant decision, submit an offer and compete against 10 other people, and that's too much pressure for that big of a decision.

Speaker 2:

So now we're in an interesting scenario where it's kind of shifting. Before it was the seller's market and now it is far more balanced. So now we have higher interest rates, which makes the payments higher, which means you qualify for less house. However, there's some pluses to that, although you wouldn't think so. Number one is that you don't have that crazy competition. You could look around and there's an old real estate saying you know, marry the house and date the rate. If the rates come back down, especially for a VA loan, you could do something called an EARL, which is an interest rate reduction loan, which is a streamlined process. There's also something we weren't seeing back then, where you can try to negotiate concessions in the purchase to buy down the interest rate or cover some of your closing costs and you might have to plan on buying a slightly smaller home than what was happening before.

Speaker 2:

So what really gets interesting here is we have a lot of new home builders and they're offering incentives to buy down the rates in a couple of ways. One is a permanent interest rate reduction, the other one is a 2-1 buy-down. So let me kind of give you an idea. So with a 2-1 buy-down, let's say the interest rate is right now 6.5%. Okay, a 2-1 buy-down. Your first year you'll be paying as if the interest rate were 4.5%. The next year the interest rate would be 5.5%. In years three through 30, the rate is 6.5%, and so it kind of gives you. They try to tie it in with increases. That can happen with the basic housing allowance, which is called BAH, or with their hopefully their promotions.

Speaker 2:

And what makes that kind of interesting is new construction has much higher property taxes, and so people go oh, this is brand new, I like this. There's no toenail clippings in the carpet. But you have to balance that by looking and this is one thing I try to guide my clients through is oh, it's exciting, you know, just be careful. You're. You know, are you buying the sizzle or the steak? Because they take the new models and they make them really beautiful and they load them with tens of thousands of dollars worth of upgrades.

Speaker 2:

You walk in, you fall in love, but the actual home may not look like that. You may not get landscaping for the backyard, you have to install the window coverings. So I really try to walk them through. Okay, this one has a better interest rate, but the taxes might be higher. Here's an older home that has better taxes. The interest rate might be higher, but let's kind of balance out the payments, because the bottom line is I want my clients, after they buy a home, to be able to take a vacation, to be able to go out to eat, to be able to put money aside. So there's a lot of different pressures and challenges, but luckily, after doing this for 40 years, I can walk them through some of those issues.

Speaker 3:

A lot to think about, a lot to consider. Do you have a preference or is it just basically based on the needs of your client? Do you have a preference of the higher interest rate and the lower taxes, or the lower interest rate, the higher taxes? Which, have you seen, benefits your clients more, or is that a case by case basis?

Speaker 2:

Yeah, that's definitely case by case and it really depends on what they prefer. I just want them to have all of the information, and so I think you make better choices when you have all of the information and if it's worth it for you to have the brand new home which some people prefer. That's one group of people, and if other people are looking at long-term ownership costs, that's a different group of people, and so a lot of it comes about through conversation, and I want them to have the knowledge to make an informed decision. I am not interested in a quick sale and a quick commission. I am interested in a lifetime client that feels like I educated them well and treated them well.

Speaker 3:

That's wonderful to hear, because there's nothing worse than getting into a home and I've had this experience and you look back and there are things you wish you knew, different choices you would have made based on that. Do you have any strategies that buyers can use to offset the effects of rising rates?

Speaker 2:

You know, the best thing they can do is to look at the whole picture, save up money for incidentals. So most of the time it's, and it's kind of when you look at the historical perspective. When I got my license in 1985, the interest rate was 13.5 percent.

Speaker 3:

That always blows my mind when you say that.

Speaker 2:

Yeah, but keep in mind the average price of a house back then was $79,000. So you have to look at it and if it exceeds your BAH, which is the allotment the military gives active duties towards housing, then you have to look at. Okay, my principal balance will be going down each month and I get to write off. Hopefully, depending on their tax structure, they get to write off the property taxes and they get to write off the interest they pay on that mortgage and you kind of balance that out with an ownership cost and an investment cost.

Speaker 2:

So what's kind of interesting here is we are the second most requested military assignment. We come in right behind Hawaii and after Hawaii, after they've been through some island fever, they can't wait to get here because we have Cracker Barrel. We just have more choices for them to go, or the things they may have missed. Choices for them to go or the things they may have missed. And then a lot of veterans choose to retire here. So some of my clients, let's say they buy here and then they know they're receiving orders to move somewhere else. A lot of them choose to keep the house here and to rent it out with the goal of coming back someday for retirement or just as an investment, because of our four military bases.

Speaker 3:

It's really, really smart. And then, even going back to what you said earlier about the crazy COVID time where people were overpaying for homes, and it's one of those things you were talking about, the math and having things balance out and it's like if you have a 2.5% interest rate but you've overpaid for the house, you're probably more likely to overpay the total of the loan versus having a slightly higher interest rate and paying fair market value for that. Exactly.

Speaker 2:

So there's six of one, half dozen of the other. Nobody knows what the rates will be in the future, but if you find a house you like with a payment that you're comfortable with when the rates go down, you win, because you're not in that competitive. Oh, I've got to submit an offer right away and I've got to do all these bells and whistles and I have to overpay. If you buy the house now, you can refinance it. If you wait for the rates to drop, you may or may not be able to get the house. So it's just kind of looking at the whole picture and I would rather inform someone to the best of my ability and have them decide that buying right now may not fit for them, rather than ever pressuring anyone which isn't really my nature to do something that could be detrimental to them later on.

Speaker 3:

Absolutely, and what I've noticed is that most people are only in their homes five, seven, maybe 10 years and they're concerned about an interest rate that lasts 30 years. So a lot of their trepidation is for not because they won't even be in that home. Long term life changes, we all know that, but by now, don't wait, laura. Your expertise is invaluable. Thank you for helping us understand how to navigate rising rates to our listeners. We'll see you next time for more insights on real estate in Colorado Springs. Thanks, thank you.

Speaker 1:

That's a wrap for this episode of your Colorado Springs Life and Home. Got questions, need advice? Just want to talk about interest rates and granite countertops? Call or text Lori at 719-332-1807. Yes, she'll really respond. Or visit lorithompsonremaxcom to get started with your lifetime realtor, because when it comes to Colorado real estate, lori doesn't just know the market, she is the market.