Steve Fost | Newsday | Getty Images
Amid rising interest rates and a softening housing market, homebuyers continue to withdraw at a high rate.
About 64,000 home purchase contracts were canceled in August, according to a new report from Redfin. That equated to his 15.2% of housing deals started that month, compared to 15.5% canceled in July. A year ago, the share was 12.1%.
If you’re considering joining the ranks of people walking away from an ongoing deal, it’s important to know if it costs you to do so. If so, it’s worth determining if you can cancel at some point in a way that doesn’t make you lose money.
Your deposit may be at risk
Details vary from state to state, but buyers typically provide what is called a down payment or “good faith” down payment when a housing offer is made.The amount is usually 1% to 5% of the purchase price However, it can be as high as 10% depending on the local market.
The deposit will be held in an escrow account and will be applied towards a down payment or other closing costs when confirming the purchase at checkout.
If the seller has accepted your offer and signed a purchase agreement (weeks or months before settlement), you risk losing that security deposit if you try to withdraw from the agreement without meeting the terms.
Contingencies help protect buyers
Given the financial risks if the contract is broken, it makes sense to ensure that the final purchase is contingent on certain aspects of the home purchase. Common contingencies relate to home inspections, appraisals and financing.
For example, if the inspection reveals a problem with the home that you are unacceptable for, a home inspection contingency usually means you can walk away and get your security deposit back. Alternatively, if the appraisal fails to reach the agreed-upon sale price, or if the mortgage cannot be secured at the interest rate or terms specified in the contract, it can be canceled without any loss of money.
But be aware that the process and conditions under which you can collect your deposit vary from state to state, said Erin Sykes, chief economist at real estate brokerage firm Nest Seekers International.
Details from Personal Finance:
Car buyers pay 10% more than sticker prices on average
62% of workers cut savings amid economic uncertainty
Here’s how to prepare for student loan forgiveness
For buyers, a softer market means they are more likely to close deals with contingencies than they were just a few months ago.
“Buyers are undoing contingencies [purchase agreements] …and don’t give everything to the seller like they did,” said Stephen Rinaldi, president and founder of the Rinaldi Group, a mortgage broker.
Al Bingham, mortgage loan officer at Momentum Loans in Sandy, Utah, said there’s also the issue of affordability that’s driving buyers away, especially in new construction.
Basically, new homes will take longer to complete due to ongoing supply chain issues affecting construction. This means that the current interest rate available to the buyer prior to settlement may be higher than before construction commenced.
Buyers are “willing to walk away even if they can qualify because their housing payments have gone up,” Bingham said. “They can’t afford it.”
Rising interest rates put the brakes on the housing market frenzy after two years of soaring home prices. The average fixed rate on a 30-year mortgage was 6.7% on Friday, up from about 3.3% in early January, according to Mortgage News Daily.
The difference that higher interest rates make can be stark.
For example, if you have a $300,000 home loan at 6.7% over 30 years, your monthly payments for principal and interest only would be $1,935. Paying the same loan at 3.3% would result in a payment of $1,313 (a savings of $622). These amounts do not include other costs often included in mortgage payments, such as homeowners insurance, property taxes, and private mortgage insurance.
“The market has changed rapidly,” Rinaldi said. “There weren’t that many from people who were offering $40,000 more than the asking price, waiving tests and promising to have their first child, because the rates went up so quickly.”