Mortgage rates have doubled in the past few years, making it difficult for the average family to afford a home. Depending on the region, renting a home is an expensive option, too. Luckily, there are several pathways toward homeownership. Explore the top 7 ways to buy a house with today’s high-interest rates.
1. Improve Your Credit
A clever way to buy a house in today’s marketplace is by improving your credit. For example, consumers with prime or super-prime credit histories will have a lower interest rate compared to others with lower credit scores. Although interest rates are still high, consumers with excellent credit can lock in the lowest rate possible.
Improve your credit by paying bills on time, paying off debt and avoiding new credit inquiries with other lenders. Right now, your mortgage lender should be the only inquiry into your credit.
2. Consider a Smaller Property
Many consumers have a fantasy home in mind, which includes plenty of space for entertaining and other diversions. When interest rates rise, it’s time to break down your needs versus desires. For example, you have a spouse and two children. Ideally, a home with at least two bedrooms is a necessity. Extra bedrooms, a swimming pool and a recreation room are desires that may be too expensive for this period. In the future, you may be able to buy a larger property with those desires as interest rates drop.
3. Buy Points
Mortgage points are another clever resource when buying a house with high-interest rates. When you buy a point, you pay 1% of a home’s value upfront. This point translates into a 0.25% decrease in the mortgage’s interest rate. For example, you’re buying a $400,000 home. One point equates to $4,000. If your lender quotes a 7.0% interest rate before the mortgage point, then you’ll have a 6.75% interest rate afterward.
Depending on your state’s laws, you can only buy a certain amount of points before closing on a home. In most cases, four points is the maximum amount.
4. Try Adjustable Rate Loans
For conservative buyers, applying for a 30-year fixed mortgage is typical. This loan includes a steady payment schedule, which doesn’t fluctuate with any interest rate changes. If you want a slightly lower interest rate, however, look for adjustable rate loans or ARMs.
These loans often have introductory periods enticing consumers with low rates until they adjust about five or seven years later. In the end, you can use this loan during its introductory period and refinance it later on.
Furthermore, refinancing the ARM is another way to improve your credit. With interest rates dropping in the future, a refinance pays off one loan and starts a new loan. As a result, your credit score increases and you gain a lower interest rate than before.
This overall strategy may take a bit more effort than a fixed loan, but it’s a legitimate option for lower rates.
5. Save Up a Large Down Payment
Most lenders ask for a 20% down payment on any home. This amount shows good faith in the investment, for instance. Here, your credit score defines the interest rate.
If you put down a larger down payment, then you’re showing the lender that you’re a borrower with less risk. You finance a smaller amount, which lowers the interest rate. Although there are laws regarding minimum interest rates, gaining access to the best deal is how you can buy a home during these economic times.
6. Look at Another Neighborhood
Be flexible with your chosen neighborhoods. By choosing a neighborhood that’s merely a few miles east or west of your target area, thousands of dollars can be saved. It’s a real-estate reality that some ZIP codes are simply more popular than others. Work with your agent on alternative neighborhoods. As a result, you might find a more affordable home nearby that’s still budget-friendly with today’s interest rates.
7. Wait Out the Market
If interest rates are still an issue after exhausting all your efforts, stay put for now. Work on your credit, save up for a larger down payment and keep an eye on interest rates. In a few months, it may be the ideal time to buy a home. The difference in interest rates after improving your credit history can be staggering.
Investing in real estate will always be an intelligent way to build wealth. By putting extra effort into your purchase, that dream home can be yours. Careful money management is the key to your investment goals.