Do you need to move or buy a new home in the near future? According to the latest research by bankrate.com, most Americans currently want to stay put, mainly because of the current high-interest rates.
Still, life happens, and people may have to move for a variety of reasons: better economic opportunity elsewhere, a better quality of life, health, or to be closer to loved ones.
We at Confident Money are here to help you manage this challenge.
The Current Situation
The payment for a comparable home has nearly doubled (up 96%) in the last few years due to rising mortgage interest rates and slightly higher home prices.
Today, the average home price is $384,500 (bankrate.com).
The average interest rate for a 30-year mortgage is 6.62%.
The average interest rate for a 15-year mortgage is 5.89%.
On a new 30-year fixed loan, the average monthly mortgage payment is $2,883.
On a new 15-year fixed loan, the average monthly mortgage payment is $3,840.
Higher Mortgage Interest Rates Create More Financial Risk
As you may recall from previous newsletters, you have more financial risk on the table when:
You have a high loan balance based on your income.
You have a long-term payment schedule.
You have a higher monthly payment.
The standard rule of home affordability is that you should not spend more than 28% of your gross monthly income on a mortgage payment. Going over that amount substantially increases your financial risk.
Two primary strategies to deal with high-interest rates:
Defer the purchase.
Mitigate the harm of a higher interest rate.
Which strategy/technique is more viable for your situation?
Deferment
Don’t move right away. At the same time, try to reduce your monthly costs and save money for a larger down payment at a later date.
Rent in your desired area. You can move into a rental and wait for interest rates to drop, which has historically happened in the past. This will also give you time to save more for a larger down payment and to ensure living in the new area works for you. You may have to wait for a couple of years, but it is typically much easier and cheaper to break a lease than it is to sell a house you just bought.
Move in with family and wait for rates to drop. This go-to strategy among younger home buyers is not as attractive if you are married or have children. But the upside is being able to help older relatives with their monthly expenses in this inflationary economy.
Mitigation
Make a larger down payment to reduce your monthly payment and your overall costs for the mortgage. If you do not have the entire amount, maybe you are lucky enough to have family that can gift some money to this worthy cause. This would also be a good use of inherited money should you be bequeathed such a gift.
Shop your mortgage loan for the best rates at traditional banks, mortgage brokers, mortgage banks, credit unions, new home builders, and the VA (if you’re a veteran). Ask your realtor about special programs such as First Time Homebuyers, FHA and VHA loans. Be sure to use the Annual Percentage Rate (APR) to compare loan offers. The APR takes into account all fees (and there are a boatload) that seem to sneak into the loan from every direction. Your loan officer can run your anticipated numbers and provide you with approximate figures that are usually good for 30 days. Page three of the document usually contains the APR you will pay. Don’t forget to negotiate the closing costs on your mortgage for significant savings.
New-construction homes can be a good deal. Fewer people are buying new homes, which means many are standing empty. You might be able to get a deal or even a builder-provided loan for one of their unoccupied new homes.
When zoning rules allow, take on a roommate(s) to help lower your expenses. I have even seen married couples use this strategy effectively. As with every roommate situation, patience and clear expectations are required.
Assume the seller’s loan. This may be a viable option based on the loan’s contractual terms. You pay the down payment to the current homeowner to buy out their equity, then continue the homeowner’s payments. Of course, this will require a loan transfer and associated fees for this service.
Consider an adjustable-rate mortgage (interest rate set lower than a fixed-rate loan and then at periodic time intervals, evaluated and adjusted). Just remember, the payments can go down or up in the future.
Explore a private lender. Investors who prefer fixed investments—or a family member—might consider loaning you the money. An attorney can draft the mortgage agreement.
Conclusion
Higher interest rates could mean you may not be able to land in a better living situation than the one you are in currently. A high mortgage payment could also mean you won’t have the opportunity to build wealth, as more of your money will go toward the house payment. But if you’re currently in the market for a new home, I hope some of the above suggestions will help you keep your payments low.
To learn more techniques to evaluate and compare loans, read The Illustrated Guide to Financial Independence: Young Adult Edition, an Amazon #1 bestselling new release.
~ Larry and Lisa Faulkner
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