Building equity through homeownership has always been a goal for many Americans and continues to be a good investment over time. Even with the rise in interest rates and fluctuations in mortgage rates being common, experts say that now is the time to act if you’re seriously thinking about buying a home.
Here are some ways you can adjust your plan to make your homebuying dreams a reality this year.
Lower your down payment
There are many programs available that do not require a 20 percent down payment to obtain a loan. Lowering your down payment can help improve the likelihood of you being able to purchase a home that may have otherwise not been possible. Although private mortgage insurance (PMI) is often required for loans with less than a 20 percent down payment, it’s still a great option especially if you are a first-time homebuyer.
Know your mortgage options
There are a plethora of mortgage lenders who offer programs that can match your financial capability. They range from mortgage bankers and regional and national banks to your local credit union. In addition, there are government-backed loans such as those provided by the Federal Housing Authority (FHA) offering affordable thirty-year conventional fixed-rate loans with a 3.5 percent down payment. The US Department of Veteran Affairs also provides VA loans where closing costs are limited and PMI is not required, and some even have zero down payments.
Lock in your mortgage rate
Like gas prices, mortgage interest rates can change quickly. This rate fluctuation will directly affect your monthly mortgage amount and affordability. To combat these variances, mortgage companies offer a lock-in, also known as a rate lock, which guarantees your interest rate won’t change for thirty, forty-five, or sixty days, or perhaps longer depending on your mortgage terms. Any changes in your mortgage application, such as a reduction in your credit score, a modification in your verified income, or an increase in your loan amount will likely void the rate lock. Be sure to review this program with your lender to fully understand the pros and cons.
Purchase mortgage points
Buying mortgage points, also known as a mortgage rate buy-down, can be an effective way of lowering your interest rate to make your monthly payments more affordable. There are two types—loan origination fees or discount points—depending on which one you choose, it will be part of your closing costs. If you are planning on staying in your home for at least ten years, the break-even point—the amount of time it takes you to earn back the points paid toward the loan—may be advantageous. However, it’s important to know upfront if purchasing mortgage points is to your benefit, especially if you are approaching your maximum approval amount.
Buy what you can afford
In today’s fluctuating market, it may be wise to obtain a preapproval based on current interest rates to give you a snapshot of what you can reasonably afford. Sometimes, the lender will approve you for more than expected but don’t feel as though you need to go beyond your comfort level. Stick within your predetermined budget to avoid the stress of feeling house poor.
Calculate renting versus buying
It may seem like the current interest rates are high, but by historical standards, they’re still very low. So if you’re currently renting, you might consider buying as your mortgage payments will likely be less than or equal to your current rent payments. For example, if your rent is $1,500 a month, that’s $18,000 per year and $90,000 over five years. The cost to rent isn’t getting any cheaper and it’s money in your landlord’s pocket, not yours. Why not start building equity in your own home?
Increase your credit score
Many factors go into getting a mortgage, but one of the most important components is your credit score. A higher credit score will likely improve your loan terms and provide a more desirable interest rate, potentially lowering your monthly payments. So if your score is a little low, take the time now to increase it by paying your bills on time, reducing your debt, and keeping balances low on all credit accounts. You may even consult with a credit repair company that can advise you on how to increase your score.
Depending on your financial circumstances and the real estate market conditions of where you want to live, buying a home can still be within reach even with the recent interest rate hikes. Take the time to do your due diligence by researching as many available mortgage programs as possible and the options available to you based on your finances. This includes lowering your down payment, buying down your interest rate through mortgage points, and asking your lender if you qualify for a rate lock. Be sure to work closely with a trusted financial expert and your real estate agent to guide you through this process and help fulfill your dream of being a homeowner.