First Home Buying Has Become More Challenging

The average 30-year fixed mortgage rate in 2021 was 2.96%. Today, first time home buyers are finding the rate has jumped to 5.42%, and it may go higher still.

Why have mortgage rates jumped so high, so quickly? The current surge is all about inflation and the government’s attempts to combat it. Consumer prices are up about 8% this year, and the government is moving to raise interest rates. This has the effect of slowing the circulation of money and holding back inflation from continuing its rapid increase.

For first time home buyers though, the increased mortgage rates can seem like a raw deal. Should you buy? Should you wait?

Sometimes, a bit of historical perspective can help. In 1981, the rate for a 30-year fixed mortgage was 18.45%. As late as 1990, it was still above 10%, but the rate has been falling gradually ever since. However, the near future does not look rosy for mortgage rates. Projections by the Economy Forecast Agency have the average rate moving back above 9% over the next four years. That makes today’s 5.42% look like a good deal.

Dealing with Rising Mortgage Rates

The first thing to do, if you are home shopping today, is act sooner rather than later. Buy today, because rates are not going to get better for a while. Second, don’t give up on your home buying plans. There are strategies for dealing with rising mortgage rates. Let’s take a look at a few.

A Bigger Down Payment

Rising mortgage rates affect your monthly payment, and if that payment is higher than you would like, see if it is within your reach to make a larger down payment. If you were saving for a vacation, new car, or just a rainy day, consider investing more of that capital in your home purchase.

• If you pay at least 20% of the purchase price, you won’t have to pay private mortgage insurance (PMI).
• Smaller monthly payments will help you build back your savings more quickly.
• Paying less interest over the life of the loan saves you tens of thousands of dollars.
• Being ready with a bigger down payment gives you better odds of succeeding in a multi-offer situation.

Reduce Your Loan Term

When you hear about average mortgage rates, they are referring to typical 30-year loans. Check to see if you can afford a 15-year mortgage. While the monthly payments are higher, the interest rate can be as much as ¾ percent lower, saving thousands, even tens of thousands of dollars over the life of the loan.

Pay Discount Points

“Points” refers to paying an upfront fee, calculated as a percentage of your loan amount, with the goal of lowering the interest rate on your loan. Any time you can lower the interest rate, you will pay less over time. Each point equals one percent of the loan and points are paid at closing.

An important thing to remember is that interest rates, even with points, will vary by lender. So, shop for lenders and pay attention to how paying discount points lowers your interest rate with each individual lender.

Adjustable Rate Mortgage

Adjustable Rate Mortgages (ARMs) offer a fixed rate for a specific length of time, like the initial 5 years. Some ARMs remain fixed for 7 or even 10 years. After that the rate resets every year, adjusting based on the current market. It could even go down after the fixed period, but you need to be prepared for a possible hefty increase.

Why consider an Adjustable Rate Mortgage? ARMs can offer lower interest rates for first time home buyers. However, they are best used by home buyers who plan to sell the home within the fixed period, or refinance before the fixed rate period ends.

Improve Your Credit Score

Regardless of the type of loan or current mortgage rates, a higher credit score will help you acquire a lower interest rate. Know what you owe. Credit scores are influenced by factors like payment history, credit utilization, length of credit history, how much credit you have, and what types of credits you have.

Did you know you can improve your credit score in less than 30 days? You can learn some of the secrets from this article on Nerdwallet: How to Improve Credit Fast.

The Best Strategy is Personal

Every couple approaches home buying with different resources, different incomes and savings, a different credit history, and different dreams. The right home buying strategy is the one that fits your circumstances best.

Finding the right home and the best mortgage takes effort, insight, and planning. As with so many things in life, however, diligence and hard work do pay off.

Homebuyer Guide

Even if this is your second home buying experience, you’ll find solid information in our “First Time Homebuyer Guide.” This 40+ page guide delivers a range of critical information from Understanding the Mortgage Process and Types of Loans to Avoiding Discrimination and which states have no LGBTDQ+ Housing Protections.

Find the Help You Need

The LGBTQ+ Real Estate Alliance, a 501(c)6 organization, was launched in June 2020 by leading members of the real estate industry.  The mission of the Alliance is to Advocate, Elevate, and Celebrate. The Alliance advocates for fair housing for all and promotes LGBTQ+ homeownership.