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Buying a Home in a High Rate Market

Buying a Home in a High Rate Market

Buying a home in today's climate depends on your financial condition and how you feel about the current housing trends and soaring mortgage rates.

Why Are Rates High?

Increasing mortgage rates are a significant challenge to buying your dream house in the current market. In January 2024, the mortgage rate for a 30-year fixed-rate loan is hovering at 6.76 percent, which is roughly 0.35 percent higher than the year prior. The increase in mortgage interest has caused a severe dent in the purchasing power of prospective home buyers.

In addition, the inventory of available homes for sale is narrowing, causing prices to soar to newer heights. Add in an increased demand for houses due to rising rent, changes in jobs, and relocation; buying a home has become a challenging experience.

Are You Ready to Buy a Home?

If you're serious about purchasing a home, try not to delay your decision. Today's housing market makes it increasingly difficult due to its instability. In addition, buying a home is a long-term investment, so waiting until rates lower may mean even higher home values down the road.

It's best to determine how financially prepared you are for purchasing a home under current market conditions. Try asking the following questions when it comes to your current financial standing:

  • Do you have excellent credit? To finance your purchase, consider your credit report and credit score when getting a home loan. With a healthy credit score of 740 or more, you can get the lowest mortgage rates a lender can offer.
  • Do you have enough savings to cover the down payment? If you have the funds, then now is the time to consider investing in your dream property. It's best to have some savings left over, as lenders will be more comfortable granting your loan if you can cover unexpected expenses.
  • Are you planning to live in your house for the long term? In addition to the purchase price, you'll also need to pay the closing price, which typically is 2 to 6 percent of the property price. It's best to justify the hefty price when you plan on living in the home for the long term.

What Are My Options?

If you are considering investing in a home but are wary about the steep mortgage rates, try getting a loan now and refinance it at a lower rate later on when the market stabilizes. But then, it is unclear when rates will stabilize or if they will get lower soon.

Until then, you will have to endure a higher loan that might cause a dent in your finances.

You can consider the following options to help you get the best deal on your home purchase:

Consider getting an adjustable-rate loan. To avoid the higher rates on a 30-year fixed-rate mortgage, home buyers are considering other financing options like an adjustable-rate mortgage.

Adjustable rate mortgages(ARM) are 30-year loans that offer a fixed rate for a specified period, typically 5, 7, or 10 years, after which the interest rate sets to the current market rate. Most ARMs will run about a percentage point lower than 30-year fixed-rate mortgages.

Getting an ARM can help you get a housing loan at a fixed rate much lower than the current mortgage rate. Then, after the set period, you can return to the current market rate and enjoy a lower rate if the market rate starts to fall.

The risk with ARM is that the borrowing rate may go even higher when it resets to the future market rate. To counter it, most ARMs have a cap on how much the rate can increase or decrease during each reset period during the loan tenure.

Pay in cash or increase your down payment. Using cash to purchase your home can help you avoid mortgage rates and will allow you to negotiate the home price. In other cases, you can pay a larger down payment, reducing your loan amount while increasing your home equity.

Ask for the seller's credit or concession. Asking for a seller's credit or concession can help buyers lower their mortgage rates and reduce their monthly payments.

Takeaway

To buy a house in current times, review your finances and consider the advice of an experienced real estate agent. Then, plan your finances well to get the best deals for purchasing your dream home.

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