You’ve been saving your money and combing the housing market and, just when you’re ready to buy your first home, you get broadsided by rising mortgage interest rates. Although higher rates definitely will add to the cost of your monthly mortgage payments, they don’t have to mean the end to your dream of home ownership. We have some advice to help you buy that house or condo, even at a higher interest rate.
Where we stand now: This week, the average 30-year fixed mortgage interest rate is 7.62%. And, although the inflation that caused the Federal Reserve to raise federal funds interest rates in the first place has been cooling, most experts expect home mortgage rates to continue to rise at least a little more. The average 15-year fixed mortgage is less – 6.81% — but because the payback period is shorter, the monthly payment would be higher than with a 30-year loan.
Consider an adjustable-rate mortgage: The average rate for an adjustable mortgage was 6.5% last month and buyers who cannot qualify for a fixed-rate loan might be able to get an adjustable-rate one. This could be a good option if you plan to sell your home after just a few years, or if you luck out and interest rates hold steady or even decline. But you could wind up paying even more than you would have for a fixed-rate loan if the interest rates continue to climb–and your monthly mortgage payment along with them.
Finding the best mortgage rates and terms: Here’s where your credit score, finances and goals come into play. Having a high credit score, little or no debt and/or a high down payment will help you get the best interest rate when you shop for a lender in person or online. Again, a fixed-rate loan offers more stability if you can afford it and if you plan to stay in your home for a long time. Shorter terms, say, 15 years instead of 30, usually carry lower interest rates but higher payments.
What can you do to up your chances of getting the best loan? First, improve your credit score! Pay off car and other loans, stop carrying a balance on your credit cards, use credit cards lightly and pay the balance in full each month. Check your credit rating with the three major reporting bureaus and clear up any errors or bad marks. Be sure to pay all your bills on time. Almost always, the higher your credit score, the more favorable terms you will get on your mortgage. Then, lock in your interest rate so you don’t get stuck with a higher rate before your loan closes; if rates improve before then, you can usually get the better rate.
Look for help from your retirement funds: The IRS will not allow you to tap your 401 (k) funds without penalty unless you are older than 59 ½ or permanently disabled. If you borrow from your 401K, the money must be paid back within five years. However, first-time homebuyers can withdraw up to $10,000 from a Roth IRA account without penalties in some circumstances. Check with your financial or tax advisor.
Explore other ways to increase your down payment: Perhaps a relative will lend or even gift you funds toward your down payment, or you might get lucky with a lottery ticket or an inheritance. Or you may have something like an extra vehicle or some antique furniture you could sell. Obviously, the bigger your down payment, the smaller your mortgage can be.
Try to get help from the seller: Some sellers might be in position to help you by carrying a second mortgage or even helping with the primary financing. If you are a buyer who appeals to a seller who wants to ensure that a family moves into the house or who wants to avoid selling to someone who would tear down a beloved home, you may be able to get the seller to reduce the price or closing costs to help you make the deal.
Change your expectations: If you find you can’t afford the house of your dreams, consider making some compromises to get into the housing market. Look in a less expensive neighborhood or rethink some of your must-haves. Would a three-bedroom home work instead of a four? Would you consider a condominium or townhouse in place of a single-family house? Remember, your first house doesn’t have to be your forever home!
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