If you’ve been to the grocery store, you know that prices are increasing. Interest rates are rising too, which may affect your dreams of owning a home. Navigating the path to homeownership in the face of escalating interest rates can be challenging, but it’s far from impossible. With the current average mortgage rate at 6.63% for a 30-year fixed-rate mortgage, many aspiring homeowners are understandably cautious. However, while rates have climbed, they’re still lower than the historical average of 8% between 1971 and December 2020.
How Higher Interest Rates Affect Homebuyers
Let’s look at how higher interest rates can impact your ability to buy a home.
- Qualifying for a Lower Loan Amount
Your monthly mortgage payment also increases when interest rates rise. This means you’ll qualify for a lower loan amount, which could be a bit of a setback, especially for first-time buyers.
What You Can Do: Consider saving for a larger down payment to offset the lower loan amount or explore loan programs with lower interest rates or low down payment, closing cost assistance.
- Finding Homes in Your Price Range
The real estate market can be slow to react to rising rates. While sellers might eventually lower their prices, it may not happen right away. Currently, there’s a shortage of homes on the market, and pent-up demand could sustain higher prices for a while. So, brace yourself for the possibility of being temporarily priced out of your ideal home.
What You Can Do: Be patient and continue monitoring the market for price reductions. Alternatively, expand your search to slightly lower-priced properties or explore different neighborhoods
- Higher Mortgage Payments
As stated above, rising interest rates translate to larger monthly mortgage payments. This means you’ll be allocating a bigger chunk of your monthly budget to your home, making it necessary to ensure this aligns with your overall financial goals.
What You Can Do: Consider reevaluating your budget and reducing other expenses to accommodate a higher mortgage payment. You could also explore mortgage loan programs that offer lender-paid Private Mortgage Insurance (PMI) or low down payment, closing cost assistance, which could reduce your monthly mortgage payment amount.
- Tougher Loan Approval
Higher interest rates can also affect the mortgage approval process. Lenders may become more stringent in their criteria, leading to more rigorous standards for loan applicants. You might face tougher requirements when applying for a loan as a homebuyer.
What You Can Do: Enhance your credit score, reduce existing debts, and gather all necessary financial documentation to strengthen your loan application.
5 Ways to Prepare for Homeownership
Higher interest rates might not be ideal, but they don’t have to be a deal-breaker. Here’s what you can do to prepare:
1. Focus on Your Finances
The path to homeownership starts with a solid financial foundation. The better your financial situation before applying for a mortgage, the easier it will be to qualify for a lower interest rate and a larger loan. Here are some essential steps to boost your financial fitness:
- Reduce Debt
Lenders have a keen eye on your debt-to-income (DTI) ratio when assessing your eligibility for a mortgage. Your DTI is a straightforward calculation that compares your income to your debt payments. To significantly impact your DTI, focus on paying off debts. Start with the ones that carry the biggest monthly payments. If you’re planning to buy a home further down the road, consider tackling debts with the highest interest rates first. Remember, reducing debt is often more feasible than magically increasing your income.
- Raise Your Credit Score
Your credit score is a crucial factor that lenders consider when determining your interest rate. A higher credit score can help you get lower rates. Major influences on your credit score include making on-time payments and maintaining a low credit utilization rate on revolving lines of credit. Keep a close eye on your credit report, dispute any inaccuracies and work diligently to improve your score.
- Save for a Down Payment
Your down payment is another significant factor affecting your interest rate. Put simply, the larger your down payment, the better your interest rate because it signifies less risk for the lender. Start saving early and consistently to bolster your down payment funds. This enhances your loan eligibility and reduces your monthly mortgage burden.
- Reduce Your Budget
Finding ways to trim your budget can make a noticeable difference in your financial health. Small adjustments can add up over time. For instance, if you’ve subscribed to multiple streaming services, evaluate which ones you use and enjoy and discontinue the rest. Cutting unnecessary expenses can free up funds for debt reduction or saving toward a down payment. Every little bit counts: it doesn’t have to be a drastic change.
2. Find a Real Estate Agent
A seasoned real estate agent can be your guiding light in a challenging market. They’ll help you find properties within your budget and negotiate on your behalf.
3. Get Preapproved
Before you start your house hunt, get preapproved for a mortgage. This gives you a clear idea of your budget and shows sellers you’re a serious buyer.
4. Look Beyond the 30-Year Fixed-Rate Mortgage
Don’t limit yourself to the standard 30-year fixed-rate mortgage. Consider adjustable-rate mortgages (ARMs) with fixed introductory periods. These can offer lower initial rates and may be a smart choice if you plan to move or refinance before the adjustable period kicks in.
5. Be Prepared to Adjust Your Budget
Stay flexible in a volatile rate environment. Keep in touch with your lender, and be ready to adjust your budget as needed. This will help you avoid unpleasant bumps in the road.
We’re Here for You
While rising interest rates can pose challenges for prospective homebuyers, they shouldn’t discourage you from pursuing your homeownership dreams. Amegy Bank has a variety of options that can help you finance a home purchase and friendly bankers who can assist you and answer your questions.
Reach out to Amegy Bank today.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.