06/20/2023
Tips on Buying a home in high interest rate environment!!
Buying a home for the first time in a high interest rate housing market can be challenging, but not impossible. Here are some tips that might help you:
- **Don't panic**. Interest rates are still relatively low compared to historical averages, and there are many benefits to homeownership, such as building equity, tax deductions and appreciation.
- **Stay informed and focused**. Research the market conditions, the neighborhoods and the types of homes you are interested in. Set a realistic budget and stick to it. Be prepared to act quickly when you find a home you like, but don't compromise on your must-haves.
- **Kill unnecessary spending and debt**. The less debt you have, the easier it will be to qualify for a mortgage and afford the monthly payments. Pay off your high-interest credit cards, avoid taking on new loans and cut down on discretionary expenses. Save as much as you can for your down payment and closing costs.
- **Maximize cash for a down payment or rate buydown**. The more money you can put down, the lower your interest rate and monthly payment will be. You can also pay for discount points upfront, which are fees that lower your interest rate for the life of the loan. Each point costs 1% of your loan amount and typically lowers your rate by 0.25%. For example, on a $300,000 loan, one point would cost $3,000 and lower your rate from 4% to 3.75%².
- **Use that cash for an interest rate buydown AND a longer rate lock**. If you are worried about rates going up before you close on your home, you can lock in your rate for a certain period of time, usually 30 to 60 days. However, some lenders may charge a fee for this service, or offer you a higher rate than the current market rate. You can use some of your cash to buy down your rate and extend your lock period, which can save you money in the long run¹.
- **Consider an ARM with a low intro rate**. An adjustable-rate mortgage (ARM) has a fixed interest rate for an initial period, usually 5 to 10 years, and then adjusts periodically based on market conditions. If you plan to stay in your home for a short time or refinance before the rate adjusts, an ARM can offer you a lower initial rate than a fixed-rate mortgage.
- **Use a shorter loan term**. A shorter loan term, such as 15 years instead of 30 years, will not only lower your interest rate but also reduce the total amount of interest you pay over the life of the loan. However, this will also increase your monthly payment, so make sure you can afford it comfortably.
- **Choose a different property**. If you are struggling to find a home that fits your budget and needs in your preferred area, you may have to expand your search or compromise on some features. You can also look for homes that need some work or are in foreclosure or short sale, which may sell for below market value. However, be aware of the potential risks and costs involved in buying such properties.
- **Choose a different loan product**. There are many types of mortgages available for first-time home buyers, such as FHA loans, VA loans, USDA loans and conventional loans with low down payment options. Each one has its own eligibility requirements, benefits and drawbacks. Compare different loan products and lenders to find the best fit for your situation.
I hope these tips help you achieve your homeownership goals. Call Will Bowers Select Mortgage Advisors at 502-262-2019 or email at [email protected] with any questions.
