Beat high rates: A guide to creative financing

In today’s high-rate world, the usual 30-year fixed mortgage isn’t the only game in town. Creative financing can help make the math work. Here are a few options to consider, along with the trade-offs to weigh before taking the plunge.

Rate buydowns

You can’t bring rates down, but you can buy them down—at least temporarily. The most popular is a 2–1 buydown: If your rate is 7.5%, you pay just 5.5% the first year and 6.5% the second before it returns to 7.5%. “This gives the borrower a lower payment for the first two years,” explains Scott Alberson at Gershman Mortgage. As the name suggests, buydowns aren’t free, though lenders, builders, and even sellers often cover the cost. The catch: Unless you refinance, you’ll have to pay the full rate in Year Three, so you’d need to make sure you can afford to if it comes to that.

Seller financing

Lenders don’t have to be banks. Oren Sofrin at Eagle Cash Buyers convinced the seller of his latest purchase to lend him the $360,000 he needed at 7%, below 7.3% market rates. Why it worked: “The seller was happy to receive monthly payments with interest,” Sofrin explains. Between the lower rate and skipping closing costs and mortgage insurance, he estimates he’ll save $15,000 to $25,000 over five years. The catch: Like dating, this arrangement takes trust. Here’s more on seller financing.

Family loans

Buyers can also tap the bank of Mom and Dad—a win-win arrangement at the right rate. When Jon Dulin at Money Smart Guides helped a homebuyer borrow $375,000 from her parents, “they settled at 5%—which was lower than mortgage rates, but higher than the parents could get in a high-yield savings account.” The catch: Nothing sours Thanksgiving like chasing a relative for a loan payment. Families can head off the awkwardness by formalizing the deal through a service like National Family Mortgage.

Assumable mortgages

About one in three mortgages is assumable, meaning buyers can take over the seller’s existing loan—along with its lower interest rate. Buyers can hunt for assumable loans on sites like Roam, which lists not only prices but also the rate you’d inherit. The catch: Only FHA, VA, and USDA loans are assumable, and the paperwork can be complicated. Still, the average $200,000 savings in interest over the life of the loan could be well worth the trouble.

Subject-to mortgages

In this arrangement (also known as sub-to), the loan stays in the seller’s name, and the buyer makes the payments, keeping the (often low) rate intact. This is how Sierra Davis at Essential Investment Group acquired a property by agreeing to pay the seller’s $108,000 balance. “What made the deal work was that I did not have to qualify for an entirely new loan,” she says. “I stepped into an existing financing structure.” The catch: These loans are risky since the original lender could invoke a “due-on-sale” clause demanding the loan be paid off in full, so you’d better have a backup plan in place just in case.