10 ways home buyers can overcome rising interest rates
A mortgage payment is one of the biggest financial commitments you’ll make in your life. With home prices and mortgage rates on the rise, you’ll naturally have some concerns about whether you're ready. These 10 strategies will give you the opportunity to make your mortgage more affordable and make your goal of buying a home a reality.
1. Do the math. Owning a home may seem costly, but it's not necessarily more costly than renting. High demand for housing, low supply of for-sale and for-rent homes, and inflationary pressures in the U.S. economy have made all types of housing more expensive. Before you decide whether to rent or buy, talk to a loan officer about your options. A mortgage payment may be more affordable than you think.
2. Focus on the benefits. Historically, owning a home has been a reliable path to building equity and wealth over time. But that's not the only benefit. You'll typically get more bedrooms and bathrooms, a larger kitchen and living areas, outdoor space, and a shared or private parking garage. With a detached home, you won't have neighbors' residences on the other sides of your walls, floors, or ceilings. If you itemize your deductions on your federal income tax returns, you may be able to deduct all or part of your mortgage interest, property taxes and mortgage insurance premiums.
3. Rethink your budget. Some financial advisors tell their clients not to spend more than 30 percent of their income on housing. With affordability a growing challenge, however, that limit may not be realistic for you. If housing is expensive where you live, it may be reasonable to put more of your income toward your mortgage payment, as long as it leaves enough room in your budget for other necessities. Depending on where you live, owning a home could result in some big savings in your budget by lower commuting costs or school fees, you may have more income available for your mortgage payment.
4. Boost your credit score. Raising your credit scores a few points probably won't make a significant difference in your mortgage payment. But if you've had some issues with credit in the past, boosting your scores could help you qualify for a lower rate and a lower payment for the same type of loan and loan amount. To raise your scores, pay your bills on time, use a mix of different types of credit, don't open a lot of new credit accounts and utilize less of your available credit.
5. Ask about special loan programs. All mortgages are not the same and there's likely a mortgage product that will make your payment more affordable for you. Ask your loan officer about special loan programs for first-time home buyers, borrowers with low or modest incomes, military servicepersons, people who live in rural areas and medical professionals, among other groups.
6. Update your wish list. After you've reviewed your budget and decided what type of mortgage you want, it's time to focus your search on homes you feel you can afford. If your budget is tight, a smaller house, an older home that you can update over time, a townhouse or condominium, or a home in a more affordable neighborhood may make sense for you.
7. Check out the charts. Today's mortgage rates may seem high compared with the low rates of recent years. But historical data show that mortgage rates are actually still relatively low. From 1986 to 1990, rates in the 10 percent range were the norm. And that was low compared with the peak rate of 17 percent in 1982. While house prices were lower in 1982, salaries and wages were also lower. Over time, inflation affects both housing markets and labor markets.
8. Raise your income. Often easier said than done, but if your paycheck won't stretch far enough for you to buy the home you want, additional income sources may help to close the gap. Ask your employer for a raise. Get a second job or start or expand a side hustle.
9. Utilize gift funds. Some home buyers are lucky enough to receive cash as a gift from their parents, grandparents or other family members when they buy a home. If you received this type of gift, you could use those funds to increase your down payment or to pay for mortgage points to buy down your rate. Either strategy could make your payment more affordable.
10. Focus on the positive. Higher mortgage rates also come with an upside: fewer buyers, which means less competition and more negotiating power for those who remain active in the market. You may pay more for your mortgage, but get a lower price for the home you want to buy.
It's normal to experience a rollercoaster of emotions when you shop for and buy a home. Challenging market conditions can intensify those feelings. It may be more challenging to find the right house for you at the price you can afford. You’ll need to be more than a savvy mortgage shopper, and you may need to follow many of the steps above like rethinking your budget or improving your credit rating. Buying a home may take more time today. Owning a home can still last forever.