How do I buy a home when interest rates are rising?
“I want to purchase a home, but how can I deal with higher interest rates?” Many clients have reached out to ask me this question recently. In case you don’t know, the Federal Reserve recently raised rates by 75 basis points—the largest increase since 1994. Mortgage rates have already responded, and they’re likely to increase further throughout the year. Rates are still low historically, but there’s no denying that recent increases make it more difficult to purchase a home. If you’re looking to buy, what can you do?
Fortunately, there are tons of creative ways to adjust your strategy and prepare for higher rates, and I want to share three of them with you today:
1. Improve your credit. You may think your credit score is already as good as it can be, but there is always room for improvement. Start by paying off your debt little by little. This will lower your debt-to-income ratio, which is what lenders use to determine your creditworthiness. You can also save up for a bigger down payment to improve your credit and lower your rate. The results may seem small, but even a tiny difference can add up to a huge amount over the course of a loan. We can help you here. We have resources and referrals for you.
2. Lock in your mortgage rate when it makes sense and consider niche loan products. If your lender is offering you a good rate, consider locking it in. Rates are expected to continue rising to combat inflation, but you won’t have to worry about that if your rate is locked in. Just remember that it only makes sense to lock in your rate when you’re almost to closing. Most rates only stay locked in for one to two months. Also, ARM loans are growing in popularity. Lock your rate for 3, 5, 7 or 10 years at a lower fixed rate and then it may adjust at the end of the fixed term. This is an excellent option for someone staying in a place for less than 10 years.
3. Pay mortgage points at closing. Also known as “discount points,” mortgage points are fees you can pay to lower your interest rate. One point typically costs 1% of your loan, so a point on a $200,000 mortgage would cost $2,000. A nice perk of mortgage points is that they might be tax-deductible. If you can deduct your mortgage interest, chances are you can deduct the cost of your mortgage points as well. In some cases, we are negotiating for seller’s to pay these points for our buyer’s benefit.
The truth is that it is still a great time to purchase a home. When the last Fed hike this large happened in 1994, rates were close to 8%, so our current ones look great by comparison. However, most experts believe rates will increase throughout 2022. On top of that, nothing indicates that rising mortgage rates will cause home prices to drop since inventory is so scarce. The longer you wait to purchase a home, the more expensive it will be.
If you’d like to take a look at what’s presently available on the market, you can view our multiple listing service here:
There are still plenty of opportunities in our market. If you have any questions about interest rates or purchasing a home, please call or email me. I am always willing to help!