Featuring Guest Author: Ally Gelhaar, Loan Officer Residential Real Estate Buying a home is one…
As the housing market appears dim due to rising rates and decreased affordability, being able to buy a home can be quite a financial challenge. Disappointment and doubt can easily overcome you during these times, especially if you desire to purchase a new home but now face unexpected changes that can put your goals on the back burner. We want to share with you that whether you are a first-time homebuyer, repeat buyer, or current homeowner, there is still a light at the end of the home buying tunnel.
This unfortunate situation may have you wondering, are you able to wait a few weeks, months, or even years for the market to correct itself? Maybe you can, but not everyone can sustain living in their current environment for several reasons, which we will dive into later. Your unique situation may push for the need to buy a home, even in a market where it seems unlikely. Though your chances appear slim, try not to lose hope just yet! Did you know there are ways to lower your interest rate? We have not one, not two, but several opportunities in which you can obtain a lower interest rate and achieve homeownership despite the hectic housing market.
The catch is that there are several paths to choose from, which means you have options! If and when you get quoted a high rate, you will realize by the end of this blog that it is not the end of the world and not the end of your home buying journey. We will analyze your current home buying situation, learn how interest rates work, and discover the many ways to acquire a lower interest rate.
- Should You Wait to Buy a Home?
- Why Are Rates So High in the First Place?
- 5 Ways to Lower Your Interest Rate
Should You Wait to Buy a Home?
The question, “should I wait to buy a home?” is straightforward, powerful, and something you may have asked yourself more than enough times during the early stages of your home buying experience. Unfortunately, we cannot provide the correct answer for you because… well, there is no correct answer. Your home buying situation is unique, meaning buying a home during these difficult times may or may not make sense. It all depends on your primary motivator for buying and your financial and home buying goals.
When rates are high, you have two choices: wait for rates to come down and buy later or buy now. If you can wait to buy a home, then all the power to you! We will be here when you feel ready to take the leap. However, not everyone has the privilege to continue living in their current environment for several reasons. First, ask yourself these questions:
- Do you need to upsize? Maybe you have a family on the way and need more bedrooms, or your current home does not have optimal space to live comfortably.
- Do you want to start building wealth? Real estate is a great way to build wealth over time. Renting does not provide the financial benefits that owning can, and you can start growing your equity instead of continuing to pay your landlord without any return.
- Do you want a place to call your own? You may currently live in a place regulated by your landlord or a property management company. Have you ever thought about partaking in DIY home renovations or even just painting your walls a vivid color? Owning a home can provide that sense of independence that renting cannot.
- Do you want a stable monthly payment? Have you ever had your rent increased unexpectedly? Maybe it’s for maintenance, renovations, or an undisclosed reason. Either way, these rent hikes can take you by surprise.
If you answered “yes” to any of these questions, then you may still be in the running for homeownership. It’s not time to worry about the rate just yet! Let’s learn about what determines mortgage interest rates.
Why Are Rates So High in the First Place?
Most of the time, potential buyers will be quoted different rates from several lenders but have no idea why rates stand in the position they do. Whether rates are high or low, you should know what determines mortgage interest rates to be more educated about the market.
Interest rates are determined by several factors, both in and out of your control. A great way to gauge where interest rates are is by looking at the health of the economy. If the economy is bad and inflation is high, interest rates may also be high to deter consumers from excessive spending. However, if consumer spending has decreased and the economy seems healthy, you may see interest rates at a low point, which can turn up affordability.
Other factors out of your control are the Federal Reserve, which serves to keep the economy stable, stocks, mortgage-backed securities, bonds, and the secondary mortgage market. You might be relieved to know that your interest rate will also be determined based on factors relating to your financial situation, such as your credit score, down payment, loan amount, and much more. You can find more about the factors that determine mortgage interest rates here and understand the full scope of how these rates come to be.
5 Ways to Lower Your Interest Rate
Luckily, there’s not just one way to obtain a lower interest rate. We have several options for you to leverage when buying your home.
Improve your credit score
Remember when we said your credit score can determine the interest rate you get? That was true! Your credit score is one of many internal factors that can sway your interest rate. For example, if you have an above-average credit score, let’s say, above 650, you may receive a quoted interest rate that is relatively low. However, if your credit score has room for improvement due to a high DTI (debt-to-income) ratio or red flags on your credit report, your interest rate may be seemingly high.
If you are among those with a low credit score, hope is not lost. You still have a chance at buying at a lower rate! Credit scores are not permanent, so we advise you to talk with your lender and ask for a referral to a credit repair company or financial advisor. You can also check out our guide on credit score repair for a few ideas to get started. Once your credit score is in a good position, get quoted for an interest rate and see how much of a difference it can make.
Change your loan type
What home loan type are you planning to get? Conventional mortgages are the most common type of mortgage. These mortgages, along with government mortgages, such as FHA, usually have a fixed rate that stays the same for the life of the loan.
Have you ever considered applying for an ARM (adjustable-rate mortgage)? An ARM differs from a fixed-rate loan in that your rate can adjust depending on the kind of ARM you choose. For example, with a 5/1 ARM, you will have a starting, fixed rate for the first 5 years of your loan, and then every year after, your rate adjusts based on the market and other factors at that time. Though this route is more complex, ARMs can offer lower interest rates that can save you money during the first few years of your loan before the fixed-rate period is over and your rate adjusts.
Buy discount points
If you have a flexible budget for buying a home, you may be able to spend a few thousand or more to permanently buy down the rate quoted by your mortgage lender. For example, if you are quoted an interest rate of 6%, ask your lender how much you could pay to buy points to bring it down. One thing to note is that if you want to buy enough points to lower your rate to 5%, you may need to spend more as part of your closing costs, as opposed to lowering your rate to 5.5%, which would cost less, but still be a hefty amount.
Though buying points to lower your rate is not required, it may make more financial sense for you to pay more as part of your closing costs upfront while saving more on your monthly mortgage payment. Remember that once you are in escrow and if you have decided on a rate that aligns with your financial goals, you can ask your lender to lock it in, or else it may not be the same case tomorrow!
Temporary interest rate buydown
Of course, permanently buying down your rate is not always the best option because you want to keep your closing costs to a minimum. Did you know that another party can buy down your interest rate without you having to spend more on closing costs? Our temporary interest rate buydown options will reduce your mortgage payment for the first 1-2 years of your loan as a result of a credit from an interested party. You can use these savings to invest, cover other expenses, or increase your cash reserves.
An interested party that is eligible to buy down your rate can be the seller, your agent, the builder (for new homes), and even your lender! Depending on the buydown option chosen, you can enjoy a lower interest rate and monthly payment without adding more to your closing costs. It is common for the seller to pay to buy down the interest rate, especially in a market where housing inventory has been sitting on the market longer than usual. Ask your lender about the temporary interest rate buydown options or check out our FAQ on the most common questions about this program.
Are you already a homeowner? Then we have a secret for lowering your rate known as a refinance. If you thought you were stuck with the rate you locked in the life of your mortgage, you’re not! Refinancing your mortgage is a great opportunity to lower your current rate, but only if you qualify for it.
Similar to a home purchase, a refinance requires you to submit basic documentation and provide information on your current mortgage to get the process started. While there is no guarantee that you will get a lower rate when you decide to refinance, it’s best to discuss with your mortgage advisor to see if a refinance would make sense for your financial goals. They should be able to crunch the numbers and provide an estimated rate that may be lower or higher. Remember that you still need to factor in closing costs as a refinance is replacing your current mortgage with a new one on different terms but imagine being left with a lower rate and monthly mortgage payment. That’s money worth saving!
Getting a Low Interest Rate is Not Impossible
As you can see, there are several ways to lower your interest rate, it’s up to you to choose the right option that aligns with your financial goals! Whether it’s repairing your credit score, pursuing one of our temporary interest rate buydown options, or refinancing your current mortgage, a lower interest rate is not completely out of sight. However, if you can wait out the complex market and buy when rates come down, that is completely understandable too. Your support team at RWM Home Loans will be on standby to give you the home buying guidance you deserve.
While a low rate is great to have, remember to pay attention to all aspects of your mortgage lender, such as customer service, professionalism, and efficiency. All qualities RWM Home Loans offers!
Do you ever experience stress when it comes to the home buying process? We have worked with thousands of clients to finance their dream homes, but we know firsthand that it’s not always a peaceful and smooth-sailing journey. Our loan officers pride themselves on being professional and highly communicative when meeting your home buying needs. For more ways to achieve a seamless experience as you go through the biggest purchase of your life, check out our home buying guide on minimizing stress.