New York Life | October 27, 2022
Updated October 13, 2023
Among the casualties of the Federal Reserve’s determined efforts to combat inflation through higher interest rates have been prospective homebuyers, as the average 30-year fixed-rate mortgage has soared from 3.1% at the end of 2021 to 7.6% percent by October 12, 2023.3
This jump in mortgage rates has resulted in a significant rise in monthly payments. It’s little wonder then that so many Americans feel that buying a home is now out of reach. Yet, there are a number of strategies that can help you attain your dream of a new home.
A larger down payment reduces the monthly mortgage payment by having to borrow less and by potentially obtaining a more favorable interest rate on your mortgage. Moreover, if you are able to put down at least 20 percent of the purchase price, you’ll also save on the cost of PMI (private mortgage insurance), which is typically required when a home is purchased with less than a 20 percent down payment.
An adjustable rate mortgage usually offers a lower rate than a 15- or 30-year fixed-rate mortgage, translating into lower monthly payments. Interest rates may be set for the first three, five, seven or ten years, after which the interest rate charged will reflect the then-prevailing rates. The major risk with an adjustable rate mortgage is the prospect that mortgage rates will be even higher when the initial interest rate gets reset. An adjustable rate mortgage may be more appropriate for individuals who expect to sell their home during the period of the loan (e.g., due to a job relocation) or who believe rates will be lower in the future.
Current realities may require that you modify your expectations about the home you wish to buy, your preferred location, and even the timing of a home purchase. For instance, you may want to expand your search to different locations where housing may be relatively less expensive or have lower property taxes. You may also want to delay a purchase so you can accumulate a larger down payment or until housing prices weaken.
Rather than work with a single lender, consider obtaining mortgage quotes from multiple lenders or work with a mortgage broker who may be able to offer a wider choice of mortgage products and rates that better meet your needs and circumstances.
Having a good credit score is essential to being approved for a mortgage at a competitive rate. Check out your credit score and look for errors and problems that may be dragging down your credit score.
Review your spending habits to determine what expenses can be cut from your budget, like subscription services or gym memberships that are infrequently used. Retire high cost debt, like credit cards, which will free up cash flow that can be directed to monthly mortgage payments. Reducing your debt-to-income ratio will also help you get a mortgage approval at a potentially lower rate of interest.
If you are already house shopping, some lenders will allow you to lock in a mortgage rate before a contract has been signed. If you believe rates may rise during the time it takes to find a home and close the sale, speak with your lender or mortgage broker about how to lock in a mortgage rate.
Homes that need upgrading will come at a lower price and therefore a lower mortgage payment. This option provides you with the flexibility to invest in home improvements over time and as your budget allows.
Start your house hunting during the slower months, usually November to mid-March. There may be fewer listings from which to choose, but you may find more motivated sellers at a better price point.
Discover ways to increase your income by asking for a raise, finding a new, higher paying job, or starting a side hustle.
Bonus tip: Once you’ve purchased your home consider life insurance to protect your family and ensure that your loved ones can remain in their home in the event of the death of you or your spouse.
To learn more about how New York Life financial professionals can help with your financial strategy, contact a local professional here.
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