If you’re in the market for a house, then you know that interest rates are headed upward. As the Federal Reserve tries to stem rising inflation, it is raising short-term interest rates, and those rates have a direct impact on the rates banks and credit unions need to charge.
The beneficial side to that for home buyers is that rising interest rates will likely cool off what has been a very hot housing market, which means home prices down should soon begin to decline. And keep in mind that mortgage rates are still well below historic norms. For five decades beginning in the early 1970s, 30-year mortgages carried interest rates of around eight percent.
Here are four steps you can take to pursue your dream of homeownership, even now.
1 – Make sure you’re ready
For most people, a home is their single largest investment. Don’t rush this decision because you’re eager to lock in a rate before it heads any higher. Make sure that after you make a down payment you will still have enough in an emergency fund to cover any unexpected repairs. And also make sure that the monthly payment for your mortgage, property taxes and homeowner’s insurance will leave room in your budget for maintenance and repairs. While the amount will vary, depending on the age and condition of the house, it would be wise to plan on spending at least $200 per month for maintenance and repairs.
2 – Score the lowest rate possible
Mortgage lenders don’t charge the same rates to everyone. Much depends on a buyer’s credit score. If you don’t know your credit score, you should be able to get it for free from your bank, credit union, or credit card company. Credit scores range from 300 to 850. The higher, the better. A score between 690 to 719 is considered good; 720 or higher is excellent.
The most important of five factors that impact your credit score is whether you’ve been paying your bills on time. Second is your “credit utilization.” That refers to how much of your available credit you’re using. The credit bureaus simply take a look at some point in the month to see how much of your credit limit you are using at that moment. Using less than thirty percent of available credit is good, less than ten percent is even better.
It’s also important to make sure there are no errors on your credit reports. You can obtain your reports from all three of the credit reporting agencies online at annualcreditreport.com. If you see an error, such as an indication of a late payment that you believe was on time, there will be information on the report telling you how to file a dispute.
Credit scores are ever-changing. If yours is on the low side, make sure you’re paying your bills on time, reduce the amount of credit you are using, and fix any errors you find on your reports.
3 – Consider all mortgage options
If you know for sure you’ll only be in the house you’d like to buy for the next five to seven years, consider a five- or seven-year adjustable-rate mortgage. The rate will be lower than a 30-year fixed-rate mortgage and it’ll remain fixed for that five-to-seven-year period. Or, if you can afford the payments, a 15-year mortgage will typically come with a lower rate than a 30-year loan.
4 – Consider other locations
If you’re flexible in where you could live, take a look at home prices in other markets. Housing in some markets is much more affordable than in others. And keep in mind that your monthly payment isn’t just about the mortgage. It’s also about insurance and property taxes, and taxes can vary a lot from city to city. When we moved from Chicago to Louisville in 2012, we bought a larger home and our property taxes were cut by more than half.
While the headlines are filled with news of rising interest rates, now can still be a good time to buy a home. Taking the four steps listed above should help.
Matt Bell is the author of Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.