The prolonged period of inflation the U.S. economy has experienced has resulted in higher prices for many consumer goods. As a result, the Federal Reserve has enacted a series of incremental increases in the federal funds rate, the interest rate on which financial institutions base their lending rates.
These increases have led to higher mortgage rates. From a 15-year low national average rate of 3.2% for a 30-year loan in 2020, the average mortgage rate has climbed to over 6.5% in January 2023. How has this impacted home buyers? And what can you do to adapt and adjust to the higher rates?
Higher mortgage rates have influenced the real estate market in several ways:
- Buyers may not be able to look for homes in the same price range they might have if rates were lower;
- Buyers may qualify for a lower mortgage loan amount
- Monthly mortgage payments will typically be higher;
- Renting may become a more appealing option;
- Sellers may choose to stay put rather than face the prospect of fewer buyers and the need to finance the purchase of a new home at a higher rate.
What Home Buyers Can Do
Given that interest rates in the past have risen as high as 18% – really! – there is no reason to panic over the current rates. Still, you may need to adjust your aim a bit when seeking your new home. Here are some tips.
- Make sure your finances are in order. This advice is no different than we gave when mortgage rates were at their lowest. Being in a good financial position will almost always put you in a better position to negotiate a lower loan rate and qualify for a bigger mortgage. Start by paying down any existing debt. This will improve your debt-to-income ratio, so lenders will see that you have more money available to make monthly loan payments. Pay off larger debts first.
- Build up a larger down payment. The more money you can put down up front, the less money you’ll have to borrow. That means less risk for the lender and potentially more favorable interest rates and lower monthly payments.
- Adjust your aim. What features in a new home are “must haves” for your family? And which could you do without if necessary? Is a kitchen without granite counters a deal breaker? Do you really need a fourth bathroom? Some of your wishes may have to wait if you want to purchase the home you want in the desired neighborhood.
- Clean up your credit score. Again, always good advice. Paying off credit card debt and other outstanding loans will help improve your score so that you might qualify for a lower mortgage loan rate.
- Tighten your budget. Look at the things you are spending money on every month and see what you could do without. One less meal out at a restaurant, eliminating one seldom-watched streaming service, or holding onto your current automobile for one more year can result in some helpful savings.
- Get preapproved. This has never been more important. Preapproval lets you know exactly how much you can afford to spend on a new home, let’s home sellers know you are serious and prepared to make an offer, and (in some cases) can help you lock in a good mortgage rate.
- Work with a Realtor®. It is always a good idea to have professional on your side, especially one who has seen the up-and-down cycles of the home buying market before.
Contact Berkshire Hathaway Premier Properties to Find Your Forever Home
To connect with an agent who can further advise you through the process, contact Berkshire Hathaway Premier Properties at 713-862-0000.