Homebuyers have faced a number of challenges recently.
For two years, house prices have climbed while inventory has stagnated. Now that the market is finally starting to cool, finding affordable homes is no longer a pipe dream for high-priced buyers. But capricious mortgage rates are creating another hurdle.
Rates have fluctuated up and down since June; between 5.89% and 4.99% in a few weeks. This makes it difficult for buyers to figure out if they can actually afford a home.
“Every month, we’re growing about 0.5%,” said Skylar Olsen, chief economist at Zillow. “That [has] Has a very large impact on mortgage payments. “
Experts recommend paying no more than 33% of your monthly income for housing expenses such as mortgages, taxes and insurance. For many who are currently taking a closer look at the housing market, weekly changes in current mortgage rates could push them past that threshold.
Here is a recent example. Freddie Mac’s benchmark mortgage rate rose from 5.09% to 5.70% between May 31 and June 30. Meanwhile, the percentage of monthly income for households earning $74,000 (close to the estimated national median income of $71,300) increased from 32.36% to 34.21%, according to Olson. When rates fell back to 5.17% at the end of July, the percentage fell back to 32.49% — back below the top 33% recommended by experts.
As a result, many homebuyers decide to sit back and watch for the foreseeable future. New home buyers — and those still actively looking — should brace for a bumpy ride. Olson expects interest rate volatility to continue to rebound between 5% and 6% for the rest of the year.
How to Buy a Home When Mortgage Rates Fluctuate
The home buying process can be complicated – especially if you’re new to the market and haven’t experienced the stress of ever-changing interest rates.
“It’s shocking, and a lot of people are trying to adjust,” said Shmuel Shayowitz, president and chief financing officer at mortgage lender Approved Funding.
To make the process easier and avoid being caught off guard by a rate hike, find a good lender and seek help identifying options you may not be aware of.
“Don’t be afraid to leverage their knowledge, connections, and resources,” Shayowitz advises.
Consider different rate plans
It helps if you enter the mortgage application process with an understanding of how different interest rates will affect your monthly payments and your ability to make those payments.
You can use a mortgage calculator to get payment estimates at different rates. Start with the advertised rate of the lender you’re considering, and see how the 1/8, 1/4, and 1/2 percent changes (higher and lower) result.
Remember, calculators, while useful, can only give you an estimate. The effective interest rate you are eligible for will depend on the lender, your credit score and other financial information. As a backup, ask your lender to calculate these numbers too – and list the different rates and payment plans.
Pay close attention to interest rate movements
Getting a mortgage pre-approval letter is always a good practice because it lets the seller know that you have proper financing.
But Shayowitz cautions against blindly trusting that the rates and terms that apply when you get pre-approval are still in effect, as these can ebb and flow with the market.
Be sure to check in with your lender regularly to avoid any unpleasant surprises. Better yet, have them send you price updates via text, phone, or email, Shayowitz says.
Also keep track of the expiration date on that pre-approval letter: most are only valid for 30 to 60 days.
Get prequalified for higher rates
If you’re not ready for mortgage pre-approval, apply to your lender for pre-qualification, which is based on the financial information you provide (such as your income and the amount of debt you have) and doesn’t require a full credit check.
Mortgage prequalification depends on current interest rates, which could hurt your loan application if interest rates rise when you buy a home. To get around this, ask your lender if you can get prequalified, or even preapproved, for a higher rate. Rates change daily, and while a lower rate won’t affect your application status, a higher rate may. Plus, it doesn’t hurt to know how high you can reasonably expect to get a rate.
Consider different loan options
Most U.S. homebuyers opt for a 30-year fixed-rate mortgage, but it’s not the only option. You can also consider variable-rate mortgages, which have lower introductory rates—sometimes as much as 1% lower.
ARM has a fixed introductory rate that doesn’t change for five, seven or ten years, depending on the term you choose. If interest rates drop before the end of the introductory period, you may choose to refinance your mortgage. (Many experts believe interest rates will fall below 5% once the economy stabilizes and inflation is under control.)
If you’re considering an ARM, be sure to ask your lender to explain when rates will start to adjust and how high they might rise. Once your introductory period is over, the interest rate — and your interest amount — can climb into the double digits.
Lock in your rate
Once you’ve found your dream home and are waiting to close (this process takes about 30 to 50 days), be sure to get an interest rate lock from your lender. This ensures that your mortgage rate doesn’t increase every time the average rate rises — which can happen every day as well. It can also help you lock in a good deal at a lower price.
You can usually lock in your rate for any time between 30 and 60 days, although some lenders offer rate locks of up to 90 days. Ask your lender if they have a “float down” option, which will stop your rate from going up, while allowing you to choose a lower rate if the mortgage rate drops before closing.
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