Buyers in search of homes are now encountering the highest mortgage rates seen in 22 years, and there’s a possibility that these rates may rise further in the upcoming weeks.
In addition to this, they’re facing increased home prices and limited inventory. If you postpone your decision for too long, you run the risk of being unable to afford your desired home, regardless of the mortgage rate.
Here are 10 strategies to deal with rising mortgage rates:
1. Get an Adjustable-Rate Mortgage (ARM): An ARM comes with an initial interest rate usually one to two percentage points lower than that of a conventional 30-year fixed-rate mortgage. However, after the initial period, the interest rate can adjust annually—typically after five or seven years—based on the prevailing market rate. While it carries some risk, an ARM can be advantageous if you plan to own the home for a shorter period.
2. Choose a Shorter-Term Fixed-Rate Loan: Opting for a fixed-rate mortgage that you can repay in 10, 15, or 20 years usually leads to a lower interest rate compared to a 30-year mortgage. Although your monthly payments will be higher due to the shorter loan term, you’ll ultimately pay significantly less interest over the life of the loan.
3. Buy Mortgage Points: You might want to explore the option of purchasing points to lower the interest rate on your loan. However, this entails making an upfront payment during closing. Points are most effective when you intend to stay in the home for an extended period. Your lender can assist in calculating the breakeven point to determine how long it takes for the upfront costs to be worthwhile.
4. Consider a Temporary Buydown: Similar to purchasing points, a mortgage buydown involves providing extra funds upfront to the lender in exchange for a reduced interest rate. Typically, the seller contributes funds to an escrow account that subsidizes the loan during the initial years, resulting in lower monthly mortgage payments. Builders or sellers might offer a buydown option to enhance the property’s affordability and chances of sale.
5. Make a Larger Down Payment: A larger down payment not only reduces your monthly mortgage payment for the principal loan balance but putting down at least 20% also helps you avoid the need to pay for private mortgage insurance (PMI). If you’re a first time home buyer, ask your lender to see if you’re eligible any first time home buyer grants or down payment assistance programs.
6. Consider Government Loan Programs: If eligible, government loan programs—such as those offered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and United States Department of Agriculture (USDA)—can lead to reduced mortgage interest rates. These programs often feature slightly lower rates and more flexible guidelines for credit score, debt-to-income ratio, and down payment compared to conventional loans.
7. Improve Your Credit Score: Irrespective of the loan type, a higher credit score generally translates to a better mortgage rate. Similar to making a larger down payment, a strong credit score increases your likelihood of qualifying for improved rates and lower monthly payments.
8. Shop Around for a Loan: Take the time to compare interest rates from different lenders. Besides the interest rate itself, lenders might impose various fees like origination fees, application fees, and closing costs. It’s essential to compare these expenses as they can significantly impact the overall cost of the loan.
9. Prioritize Your Wish List: Make thoughtful decisions regarding your essential requirements in a home. During the home search, buyers often create a wish list that includes crucial “must-haves” and less crucial “nice-to-haves.” You might need to consider eliminating some of the less vital “nice-to-haves” to find a more budget-friendly home.
10. Seek Guidance from a Real Estate Agent: Real estate agents can provide insights into your mortgage loan options, aiding you in finding a home within your affordable payment range. Additionally, they can guide you through the entire process, from identifying potential homes that fit your budget to navigating the closing procedures.
Purchasing a home during a period of high rates can be challenging. These suggestions can assist you in making informed decisions at present, with the option to refinance down the line if interest rates decrease.