You want to buy a house, but you don’t know if you can afford because mortgage rates continue a gradual ascent. Between rising interest rates and home prices, buying a home today will probably cost you more today than a year ago.
Mortgage rates might be slowly rising, but today is still a good time to buy a home if you follow these tips.
Can You Afford to Buy a House?
All of us at Well Kept Wallet like to keep a pulse on the latest economic happenings and all the headlines and news coverage about rising interest rates caught our interest.
So, we thought it was time to ask 1,004 people this one question, “Are rising mortgage rates impacting your ability to buy a home?”
Here’s what the final responses were:
- Yes: 144 (12.97%)
- No: 275 (28.08%)
- Not Sure: 765 (58.95%)
Did you expect to see more people to say, “Yes, I’ll never be able to afford a house”?
Even though mortgage rates are rising, they are still at near historic lows at 4.250% for a 30-year fixed mortgage. Prior to the Great Recession, 30-year rates were approximately 6.22%. If you think that’s high, anybody wanting to finance a home in 1982 would have to pay up to 17.60%!
Compared to paying roughly 20% in mortgage interest, the current mortgage rates are a bargain and are still very reasonable.
No matter where your current opinion stands about buying a home, the following tips can help you save a lot of money on your home mortgage. If you not sure if you can afford to buy a home, even though you really want to, the tips below can give you the confidence boost you need.
1. Compare Mortgage Rates
The first thing you should do with any loan is to compare interest rates from several lenders. Lenda is one of the easiest ways to compare rates from multiple lenders in a single search.
Your local news stations or realtor might state that the current mortgage rate is 4.25%. While many lenders will honor that rate, every bank sets their own lending rates.
Just like you use an online bank to earn more interest on your savings, going with an online lender can help you secure a lower interest rate because they don’t have as many physical branches to maintain. If you didn’t realize it, banks partially offset these costs by charging higher interest rates on loans.
2. Get a 15-Year Fixed Mortgage Rate
Never get a home mortgage with a variable interest rate, especially in a credit cycle where interest rates are expected to rise long-term. You might start off paying a lower rate today, but you might pay significantly more in interest than the fixed rate you could have had from the start.
Instead, only get a 15-year or 30-year fixed interest rate for your home loan. You’ll pay the exact same interest rate for the entire life of the loan.
Why should you go with a 15-year mortgage instead of a 30-year term?
Here are three good reasons why:
- 15-year mortgage rates are lower
- You pay less cumulative interest
- You’re debt-free 15 years sooner!
Let’s assume you want to buy a $250,000 house. The table below shows how much money you can save by applying for a 15-year mortgage.
|15-Year Mortgage||30-Year Mortgage|
|Total Interest Paid||$73,911.53||$192,745.90|
Your monthly payment is $570 more for the 15-year mortgage, but look how much less you pay in interest!
3. Buy a Cheaper House
Before you submit a serious offer to buy a house in today’s hot real estate market, get pre-qualified for a home mortgage. It only takes a few minutes to pre-qualify and you can see your potential interest rate and how much house you can buy.
Here’s where you need to pay attention, don’t buy a house at the top of your borrowing limit.
Banks have more stringent lending standards than a decade ago, but it’s still easy possible to overborrow. If you don’t believe me, ask any of the four million households that had their home foreclosed during the Great Recession.
You pre-qualification offer might say you can get the lowest mortgage rate for a house that costs up to $400,000. In most cities, $400,000 will buy you a large house that you probably don’t need.
Without compromising your personal safety, look for a house that costs notably less so your monthly payments and total interest paid will be a lot less. Buying a cheaper house can truly mean the difference between being able to afford a house and continuing to pay rent.
4. Improve Your Credit Score
To qualify for the best mortgage rates, you’ll most likely need a FICO credit score–or your cosigner’s–of at least 760.
What’s your current credit score?
- Excellent Credit: 760-850
- Very Good Credit: 700-759
- Good Credit: 660-699
- Fair Credit: 620-659
- Poor Credit: 580-619
- Bad Credit: Below 580
The lower your credit score, the higher your interest rate is in many cases. Buying a cheaper house and making a larger down payment are two ways to get a lower interest rate, but sometimes it comes down to improving your credit score before you apply.
Your credit score won’t magically jump 200 points in a week, but it can still improve quickly when you do the following:
- Pay your bills on-time every month
- Pay off any past due credit card or loan balances
- Don’t apply for any new credit
After your credit score moves up a bad–fair credit to good credit for instance–you might decide qualify for an interest rate you can afford.
5. Make a Minimum 20% Down Payment
In most cases, you will need to make a 20% down payment to qualify for the lowest interest rate or you will have to pay something called Private Mortgage Insurance (PMI).
If you buy a $250,000 house, your down payment needs to be at least $50,000 to waive the additional PMI points. Once your paid principal is 80% of the original amount–$200,000 on a $250,000 mortgage–the PMI is waived and you only pay the regular fixed interest rate.
Not having to pay PMI, is another reason to buy the most affordable house possible. This is an expense that you might not take into consideration until you get ready to close on the loan.
How can you afford to buy a house when mortgage rates are rising?
You follow these timeless principals that show lenders you responsibly manage your money:
- Don’t buy the most expensive house just because you can
- Get the shortest loan term you can afford
- Make a 20% down deposit at closing to avoid PMI
- Keep your credit score as high as possible
Don’t let the headlines of rising mortgage interest rates scare you away from buying a home. By using common sense, you can buy a house you love and can truly afford.
Can you afford to buy a home with today’s interest rates? Which tip is the most pertinent to you?