How To Get Your Dream Home Even In A Rising Interest Rate Environment

How To Get Your Dream Home Even In A Rising Interest Rate Environment

When you’re getting a mortgage, every interest rate point counts. That’s never more true than when home interest rates are on the rise. Rising interest rates can affect your ability to qualify for a loan, the terms and costs you can expect, and most importantly, your purchasing power and ability to afford the home of your dreams.

However, even in a rising interest rate environment, there are still things you can do that can help you qualify for the best possible rate and terms. Are you ready to get your dream home, even in a rising interest rate environment? Read on:

Get Your Credit In Shape To Get The Best Possible Interest Rate

In an era of easily available credit and low rates, small changes to your credit score may not have a huge impact on your ability to secure financing on positive terms. But when interest rates increase, every point you can add to your credit score can help. Your credit score is viewed by lenders as a strong indicator of the likelihood that you will make mortgage payments reliably and on-time, and the better your credit, the more likely you are to qualify for the lender’s best available rate.

Understanding your credit report is a crucial first step. Checking your credit reports from the three major credit bureaus — Experian, TransUnion, and Equifax — can help you to understand the status of your credit and offer insights into inaccuracies or other issues you may be able to resolve prior to submitting your mortgage application. 

Paying down the balance on credit cards, auto loans, and personal loans can also help you to increase your credit score. If your score is below 760, every step you can take to improve your credit rating will help you to save on mortgage interest. 

Save For A Larger Down Payment

When it comes to your down payment, 20% is a magic number. A down payment of less than 20% of the home’s value can trigger not only higher interest rates, but also the requirement that you secure Private Mortgage Insurance, or PMI, to protect the lender in the event that you default on the loan. PMI adds an extra cost to your mortgage payment every month until your equity reaches 20% of the home’s value. While this isn’t an interest payment, it does add to the cost of your mortgage each month. According to the Urban Institute, which analyzed data from 2021, the cost of PMI can add 0.58 percent to 1.86 percent of the original amount of your loan, which can add up to an extra $30 to hundreds of dollars on your payment each month. 

If you can, saving or borrowing from family or friends to reach the magic 20% number can result in significant savings over the life of your loan. 

Minimize Your Debt-To-Income Ratio

Thinking of switching jobs or careers, or preparing for retirement? It can pay to wait. Lenders look carefully at a buyer’s debt-to-income ratio when assessing creditworthiness. While similar to your credit score, your DTI takes your income into account, and divides your monthly income by your debt payments. If you’re thinking about leaving the workforce, taking a lower-paying job or taking on new debt in the form of a new car or personal loan, it can pay to wait until after you’ve secured financing. 

Check To See If You Qualify For Special Programs

There are a number of available programs that can entitle certain buyers to significant loan savings, but many buyers are either unaware of these programs, or unaware that they may qualify for them. Veterans, first-time buyers, rural buyers, and others may qualify for special programs and rates that can significantly reduce the cost of a mortgage. These programs include:

  • VA loans: For active or retired military members, loans guaranteed by the Department of Veterans Affairs can offer lower rates and costs.VA loans may also have down-payment requirements of as little as 0% down!
  • USDA loans: Rural buyers can take advantage of loan programs offered by the U.S. Department of Agriculture, which offer zero-down-payment options for less wealthy individuals. Qualified buyers can secure a loan directly from the Department of Agriculture, or for private loans guaranteed by the USDA. These loans, which are designed to improve the quality of life for individuals and families in rural areas, can be a great option for buyers who don’t want to live in cities or suburbs.
  • FHA loans: The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development, and offers programs for first-time buyers who may not qualify for conventional loans, either because of their credit or the amount they have available for a down payment. Mortgages insured by the Federal Housing Administration can permit down payments as low as 3.5%. FHA loans can make home ownership possible, but do require buyers to maintain PMI throughout the life of the loan.
  • Teacher Next Door Program: The Teacher Next Door program is a private program that offers grants, down payment assistance, and other benefits to teachers who want to purchase a home. Similar programs are available to members of law enforcement, government employees, active-duty military members and veterans, and nurses and healthcare employees.

Looking into these options before you apply for a loan can help you to understand your options, and to take advantage of programs that many buyers may not be aware of. 

Consider A Shorter-Term Loan

The standard term of a mortgage is 30 years, but if you can make a higher monthly mortgage payment, a loan with a term of less than 30 years can pay dividends in terms of reducing your interest rate and the total interest you’ll pay over the life of your mortgage. A term of 15 or even fewer years comes with a higher monthly payment, but it can substantially reduce your interest cost, as well as ensure that your home will be paid off — and your housing costs reduced — much sooner. Speaking with a loan officer can help you understand the short and long term impacts of different loan terms. 

When Home Means More, You Need A Team With More To Offer

Whether you’re a first-time buyer just dipping your toe into the market, or a homeowner looking for your next dream home, understanding your options is critical. Buying or selling a home is a big deal, and our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.

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