Home Buying Tips Given High Interest Rates

If you're considering buying a home soon, you might think the current interest rates are intimidating. Several factors have driven mortgage rates up in recent years, and there doesn't seem to be a decline in the immediate future. So, should you wait to complete a house purchase amidst high mortgage rates?

We at Odigo Real Estate Club understand the concerns about buying a house with high interest rates. In our guide below, we explain the cause of the mortgage rate increase and how you could handle it. 

Why Are Mortgage Rates So High?

You're not the only person asking, "Why are mortgage rates so high?" As of February 2024, the national average for a 30-year fixed-rate mortgage is around 7.25%. For comparison, the average mortgage rate in 2016 was around 3.65%. 

The increase in interest rates makes buying a house substantially more expensive than it used to be. So, what's causing the change? Blame it on multi-faceted reasons that extend beyond anyone's control. 

What Factors Are Driving High Interest Rates?

Since 2022, 30-year fixed-rate mortgages have gone up, and it doesn't seem to be dropping any time soon. The increase is unusually high in comparison to long-term Treasury security rates, which the Federal Reserve recently increased. For the first time in almost 25 years, the rate for seven-year Treasury securities exceeds the ten-year rate.

To combat inflation, the Federal Reserve increased short-term rates to adjust for increased consumer prices. However, the higher interest rate means banks must pay more to borrow funds. As a result, banks increase the interest rates on consumer loans, which include mortgages.

A higher prepayment risk can lead to high mortgage rates. If rates continue rising, mortgage holders can keep their loans at the previous rate. However, if they fall, mortgage holders can prepay and refinance their loans to get a lower rate.

The housing market and the demand for mortgage-backed securities also influence interest rates. The risk of increased mortgage payment defaults underlying MBS could cause investors to back away from the market. When that happens, rates and bond yields can go up to make the market more attractive to investors.

Top Strategies for Buying a Home With Elevated Interest Rates

You should never buy a house without ensuring you're in the financial position to do so. Still, the considerations for buying a house with high interest rates may differ from what you expected in previous years.

For instance, you should know if you can afford the mortgage, pay your monthly expenses, and have a minimum of six months' worth of emergency funds before buying a house with a high-interest mortgage. Other considerations include whether you're willing to budget and if you can live a minimalist lifestyle until you can refinance the loan.

With interest rates not appearing to drop to their previous lows soon, you might decide to do real estate transactions in a high-interest environment. If you do, follow these tips to stretch your money.

Shop Around for the Best Mortgage Rate

Before buying a house with high interest rates, shop around for the best mortgage rate offer. You should get quotes from at least three reputable lenders to ensure you agree to the best deal possible. 

If you're unsure where to begin your search for the best loan rate in a high-interest housing market, start with your real estate agent. An experienced agent will have details about numerous mortgage lenders and can recommend their top choices. 

Also, consider seeking loans from credit unions. Credit unions seem to have the best rates in the current high-interest environment, even for borrowers without an active account. 

Pay Down Debt Using Part of Your Down Payment

Lenders generally expect home buyers to have money for a down payment. Depending on the loan type and lender, the required down payment percentage can range from 3% to 20%. What most people don't know is that it's sometimes good to use a portion of your intended down payment to pay down debts.

Lenders consider total debt payments before approving mortgage loans. That includes payments toward a residential property, credit cards, student loans, and vehicles. 

If it makes financial sense to bring down your high-rate debt before buying a house with a high interest rate, you should do so. It'll make the property more affordable upfront, even though your monthly mortgage payment will be slightly higher. 

Request a Reduced Mortgage Rate From the Seller

A temporary mortgage buydown refers to a process in which up-front funds from the seller go into an escrow account for one to three years. When this happens, the money will force the mortgage interest rates and monthly payments to drop in the short term. Think of a buydown as a temporary mortgage discount. 

With high rates, many homebuyers use this strategy to buy previously owned homes and new constructions. A common temporary buydown setup can cut a home buyer's rate by 2% during the first year and 1% for the second year. By having an experienced, qualified real estate agent negotiate a temporary mortgage buydown, you could enjoy more favorable rates and monthly payments before you must pay the full interest rate.

Purchase a Fixer-Upper or Build a New One

Getting a house that needs renovations or upgrades offers one of the best ways to save money on a new home purchase. Though it does take patience and money to slowly fix up a house to your liking over time, it can lead to reduced up-front purchasing costs.

Another option involves building a new house from the ground up. New construction is a lengthy process that requires a lot of money to complete. However, you can save money long term by ensuring the property has everything you need and want without having to pay for expensive renovations, unexpected repairs, or upgrades for outdated parts of the house.

Don't Wait for a Better Interest Rate

A common assumption about a high-interest housing market is that it's better to wait for rates to decline than buy while the rates are high. Waiting for that decline can create problems for several reasons.

Firstly, the current trend for mortgage rates doesn't suggest the rates will fall quickly or soon. You could find yourself waiting for years for a perfect opportunity that doesn't come.

Secondly, when interest rates fall, the housing market will become more competitive. More buyers will be looking for properties, which will cause home prices to go up to meet the demand of home buyers. Even with low interest rates, you could unexpectedly pay more for your new home.

If you can afford the monthly payments for the home you want, it's better to buy it regardless of the interest rate. You can refinance it later.

Rent Part of the New Property

Depending on the type of property you buy, you could consider renting part of it to lessen the out-of-pocket amount you pay for your high-interest mortgage. For instance, if you purchase a duplex with no intention of using the space in both units, you could live in one unit and rent out the other. 

Sometimes, loan borrowers can qualify for a home loan by including the expected rental income from an accessory dwelling. Examples of an accessory dwelling can include the following:

• A tiny, detached backyard house
• A basement apartment
• A detached garage with an above-garage apartment

‍