High interest rates are all the rage and constantly in the news, but what does this really mean and how did we get here? While buying your first home is an exhilarating journey filled with excitement and anticipation. In today’s real estate market, there’s a significant factor that first-time homebuyers need to consider carefully: interest rates. Over the past few years, interest rates have fluctuated, and recently, they’ve been on the rise. In this post, we’ll consider why interest rates have climbed, how they impact your mortgage payment, and what you should expect if you’re thinking about purchasing your first home soon.
Understanding Interest Rates: Interest rates play a crucial role in determining the cost of borrowing money for a mortgage. They represent the percentage of the loan amount that lenders charge you for borrowing funds. Typically, when interest rates are low, borrowing becomes more affordable, as you’ll pay less in interest over the life of your loan. Conversely, when interest rates rise, the cost of borrowing increases, making homeownership more expensive and prohibitive for many Americans. Essentially, they get priced out by even a small increase in interest rates.
Factors Influencing Rising Interest Rates: Several factors contribute to the increase in interest rates, including economic indicators, inflation expectations, and monetary policy decisions. In recent times, the Federal Reserve, the central banking system of the United States, has adjusted its monetary policy to combat inflationary pressures and support economic growth. As a result, they’ve implemented measures such as raising the federal funds rate, which influences other interest rates, including those for mortgages.
Impact on Mortgage Payments: For first-time homebuyers, rising interest rates translate into higher mortgage payments. Even a slight increase in interest rates can significantly affect the affordability of your monthly payments. For example, on a 30-year fixed-rate mortgage of $300,000, a 1% increase in interest rates could add hundreds of dollars to your monthly payment. If you’re thinking of taking out a loan with high interest rate, you want to consider if this is a mortgage payment you can comfortably pay for at least awhile until interest rates decline and you have a chance to refinance your loan at a lower interest rate. When that will happen however is unclear, that is why you need to be extremely prepared for the long haul and not overextend yourself on a high monthly mortgage payment.
Affordability Considerations: When planning to buy a home, it’s essential to assess your budget and consider how rising interest rates could impact your affordability. Start by determining your comfortable monthly mortgage payment based on your income, expenses, debts, and financial goals. Factor in potential increases in interest rates to ensure that you can still afford your mortgage payments even if rates continue to rise. You want a good amount of buffer in savings and other assets in case you experience a job loss, sickness, or some other emergency in which you will need to still cover your mortgage payment. Be conservative in the amount of home or mortgage loan you can qualify for with a lender. Just because the lender can qualify you at a higher loan amount absolutely does not mean it would be financially smart to take out that loan. Assume that bad things will happen to you including sudden emergency repairs, maintenance, and let’s not forget other hidden costs of owning like taxes and insurance.
Tips for First-Time Homebuyers: Despite rising interest rates, there are strategies that first-time homebuyers can employ to navigate the market successfully:
- Shop Around for the Best Rates: Don’t settle for the first mortgage offer you receive. Take the time to compare rates and terms from multiple lenders to find the most favorable option for your financial situation. Do not feel pressure to commit to a lender too early on as you may miss out on a better offer from another lender.
- Organize Your Documentation: There is a time-sensitive factor in securing a loan especially if you have already put in an offer on a home. You will be forced to provide all types of documentation to be approved for a loan. Ensure you have these safely tagged, organized, and sorted, and be prepared to talk seriously with multiple lenders and provide each of them extensive documentation to prove your credit and income worthiness.
- Improve Your Credit Score: A higher credit score can qualify you for better interest rates and loan terms. Take steps to improve your credit profile as much as possible 6-12 months in advance of your purchase by paying bills on time, reducing debt, and monitoring your credit report for errors.
- Factor in Closing Costs: In addition to your down payment and monthly mortgage payments, don’t forget to budget for closing costs, which can include fees for appraisal, title insurance, and loan origination. Plan accordingly to avoid any surprises at closing.
- Consider Net Income: While lenders can qualify you for a loan at the top of your budget, that doesn’t mean you should take it. You have to be smart and consider your own expenses, debts, and savings goals outside of paying for your mortgage. Don’t be fooled or get caught up in ego games of pushing the max of what you can afford. You will pay for it in high interest and put yourself at a high risk of default if you try to stretch yourself too thin.
- Lenders Have No Fiduciary Duty: Beware that lenders and agents and anyone else that is part of the real estate transaction aren’t required to have a fiduciary duty to you as a customer and will not dissuade you from getting a loan if in fact are pre-approved. Even if you are getting a bad loan with high interest rates, they work off commission and have an incentive for you to purchase. You must do your own due diligence and make sure you only take out a loan on what you can comfortably afford and no more than that.
As a first-time homebuyer, rising interest rates alone shouldn’t deter you from pursuing your homeownership dreams. By understanding the factors driving interest rate fluctuations, assessing your affordability, and implementing smart strategies, you can navigate the market with confidence. Remember to stay informed, consult with financial professionals, and make well-informed decisions to secure a home that fits your budget and lifestyle. We recommend learning about your entire financial picture as soon as you know you are interested in buying a home and take steps to secure the best outcomes by planning ahead. Do not wait until you are ready to put in offer on a home only to discover that you’re not qualified. Prioritize getting pre-qualified and ensure a more safe, secure process by doing your homework first. If you’ve done your homework well, you may even decide you don’t want to buy a home. The best outcome that you can possibly obtain is ultimately the one that works for you.