The average rate on a 30-year mortgage rate just hit 7% last week, which is now the highest it has been since 2002. The interest rate increase has pushed the average monthly payment to buy a new home to $2,760 in September from just $1,561 a year ago, according to data from Business Insider.
While increasing mortgage rates may make some homebuyers think twice before buying a new home, there are ways to jump into the homebuyers market while also saving a bit of coin on a mortgage.
In a recent Business Insider article, Erica Davis, a mortgage broker at Guild Mortgage, a Myrtle Beach, South Carolina-based firm, offered some advice for people that are looking to purchase a new home.
Should I get a mortgage now?
While you may be a bit fearful about qualifying for a mortgage right now or feel it is too big of a risk, Business Insider’s guest expert Erica Davis advises taking the leap as long as the mortgage payment, combined with your homeowners insurance and taxes are roughly what you can afford to pay in rent.
Always make sure that your mortgage payment is affordable on your specific income. You should not spend more than 30 percent of your income on a mortgage and before taking out a mortgage, potential homebuyers should have six months’ worth of payments saved up as an emergency fund in the event you would lose your job or experience an unexpected expense.
Once you find a home that meets these requirements and you have enough savings, then it’s time to pull the trigger on your new home.
Assume you will refinance
One of the main reasons that Business Insider’s expert recommends buying a home even when rates are high is that you can always refinance later when interest rates drop to lower levels.
Here is an example from the Business Insider article that illustrates how your mortgage payment can change after your refinance:
If a homebuyer takes out a $300,000 mortgage at a 6.8% rate in November 2022, the mortgage payment would come in at around $1,996 per month, which would total $718,560 over 30 years. If the homebuyer is able to refinance the rate a year later to 4.5%, the mortgage payment would drop to $1,520 per month and the total paid over the life of the mortgage would drop to roughly $547,200.
While there are costs to refinancing, including closing costs, over the life of the loan you will save thousands of dollars and your monthly mortgage will be more affordable.
No one can see into the future so there is no saying when mortgage rates will drop but many experts expect the Fed will lower rates starting in mid 2023.
Ask sellers to pay some of closing costs
As interest rates have climbed over the last few months, home sales have slowed dramatically which means sellers may be willing to negotiate on both price and some of the closing costs. According to Realtor.com, in August, 92% of recent buyers had closed on sales that had buyer-friendly terms.
One way to bring down your costs when buying a home is to ask the seller to cover some of the closing costs. On a $300,000 mortgage, closing costs can easily run between $6,000 and $15,000. Negotiate with the sellers to cover some or if possible, all the closing costs of the sale.
Limit your credit card spending
Mortgage lenders will take a detailed look at your credit score, and it will absolutely impact whether you are approved and can even impact your interest rate. Credit scores can range from 300 to 850 and are divided into five different ranges:
- Very good
In most cases, as long as you have a score of 620, which falls in the “fair” range, you should be able to get a mortgage. However, a higher score will result in a better interest rate and other more favorable terms.
Business Insider’s expert recommends never carry a balance on your credit card that totals more than half of the cards limit. This can help raise your score resulting in better terms on your loan.