How To Afford A Home With High Interest Rates
The current sentiment of the US and global economy is that of uncertainty. You might be thinking the interest rate is too high, prices of homes aren’t coming down, I should wait until the market cools down, or I will rent forever. You may feel pessimistic about the possibilities of owning a home and that it’s out of reach. At Your Home, Tomorrow we are doing our research to give you the best guidance on how to afford a home!
Mentality
The most important question you need to ask yourself is “what is my goal and timeline?”.
Are you a short-term investor that wants to purchase a home and sell for a profit later, or are you a long-term homeowner looking to find that forever home? If your answer is short-term investor, our advice is to stop reading because the market is not in your favor. If your answer is long-term homeowner, then you are much better positioned and should be more confident about purchasing a home. The best way to think about this is to understand the history and value of money through time. Imagine you are buying a house in the year 2000, the average home value was $142,000 along with an average interest rate of 8.05%, which equates to a monthly payment of ~$1,050 on a fixed 30-year mortgage. You in year 2000 would think the $1,050 to be expensive, but do you think it is expensive currently? What if you got the house in the year 2000 then refinanced it in 2005 when interest rate was ~4%? Hindsight is 20/20. The point is that the current fear in the market is due to short term uncertainty. Homeowners have plenty of financial tools to manage their mortgage. Our realtors at Your Home, Tomorrow understand homeownership is a long-term journey and will be there with you every step of the way.
Preparation Phase
The preparation phase of a home purchase can last anywhere from 1 – 2 years before actually purchasing a home. The biggest hurdle during this period is securing the down payment and boosting credit score. Our advice is to kill two birds with one stone. The US credit industry has released new innovative tools, and the one that caught our attention is the Rocket Signature credit card. Rocket Mortgage is a digital mortgage lender that has released a credit card focused on down payment rewards. The card offers 5% cash back that can be directly redeemed as a down payment towards your home purchase and 2% towards mortgage balance after your home purchase. This tool is interesting as it helps build credit along the way.
This card is tailored more to the prime audience (FICO > 680). If your FICO is less than 680, we recommend cards from Capital One that offers 2% cash back cards with a $0 annual fee. Our credit specialist recommends paying down your entire balance at the time of due date to minimize utilization. This will communicate to the credit issuer that you have high spend and low utilization and thus more likely to be granted free credit line increase (CLI). More credit line, and low utilization equals high FICO!
Financing Phase
The financing phase is usually 3-4 months before buying a home. This is when you shop around with different lenders to find the best interest rate possible. Mortgage companies are currently hungry for new loans, and they are presenting 3-2-1 or 2-1 buy downs options that can help during times of high interest rates. A 3-2-1 buydown is a mortgage-financing option that gives the homebuyer the option to obtain a lower interest rate for the first few years of their loan in return for additional up-front payment. It’s very similar to buying discount points on a mortgage to get a lower interest rate. In the first year of the loan the interest rate is lowered by 3%, the second year is lowered by 2%, and the third year is lowered by 1%. The interest rate at which the loan was acquired then kicks in for the remainder of the loan. A 2-1 buydown works similarly, but instead in the first year the interest rate is reduced by 2% with the second year being reduced by 1% and the remainder is the permanent rate after the buydown period ends. The attractive factor about this buydown is that it gives you the ease of mind that in the future, if the interest rate lowers, you have the option to refinance your original interest rate.
Purchasing Phase
After securing the down payment and a good rate comes buying the property. The most important aspect of this phase is negotiation skills. You can of course do this yourself and try to negotiate with current home sellers or find a professional realtor that understands market economics. Our realtors at
Your Home, Tomorrow not only help write the articles but also provide guidance at every stage of home ownership!
