Today, I want to discuss something that’s probably on the minds of a lot of folks looking to buy a home: those pesky high mortgage interest rates that just won’t quit.
I mean, seriously, they’ve shot up to around 7 percent! Ouch, right? It can feel pretty daunting for many homebuyers out there. But here’s the deal: while it might seem like a tough nut to crack, it’s important to remember that this challenge isn’t insurmountable.
There are several things you can do to navigate around the high interest rates so you can achieve home ownership and increase your chances of securing a favorable interest rate.
First step: Improve your FICO score!
Your credit score plays a pivotal role in determining the interest rate lenders offer you. A higher credit score generally translates to a lower interest rate. Lenders view borrowers with higher credit scores as less risky, which means they are more likely to offer borrowers a lower rate. This can save you significant amounts of money over the life of your mortgage.
And – keep this in mind.
65% of your credit score is based on your payment history and how much debt you have. So, start by paying your credit bills on time and reducing unnecessary debt.
Pay your credit debt down with a 30% utilization rate. This is a term related to credit card usage and credit scoring. It signifies how much of your available credit you are currently using. For instance, if your credit limit is $3,000, your 30% utilization rate is $900. In other words, you have borrowed or charged $900 out of the possible $3,000 available to you.
Credit bureaus use your utilization rate as a key factor in calculating your credit score. A 30% utilization rate or lower can improve your score because it suggests responsible credit usage.
Second step: Take Advantage of Buy Down Programs
Buydown programs can help lower your interest rate. If your seller pays discount points at closing (one discount point = 1% of your loan balance), this prepaid interest paid at closing will help you secure a lower interest rate on your mortgage. If the discount point is $5,000 and the seller pays 2% - that’s $10,000 of pre-paid interest!
If you are thinking about purchasing a home, one option you should consider is the 2/1 Buydown Program. Many lenders are offering this program to make buying a home more affordable. Under this program, your interest rate undergoes a gradual and temporary adjustment. The interest rate drops by 2 percent in the first year, followed by a 1 percent decrease in the second year, eventually returning to the original rate by the third year.
To put this in perspective…….
If your interest rate is 7%, you would pay 5% interest during the first year, 6 percent during the second year of home ownership, and then 7 percent interest the third year.
While a 2/1 buydown can offer significant advantages, it’s crucial for borrowers to ensure they can comfortably manage their monthly mortgage payments once the interest rate reverts to its original level. The hope is that by the third year, market interest rates will be lower, allowing you to refinance your home loan to secure a more favorable interest rate.
Create an Action Plan: Partner with a Reputable Lender
As a realtor, I work with many reputable lenders, and having a knowledgeable lender by your side can be your best ally in this market. They can assist you in identifying various loan programs that align with your needs, including downpayment assistance programs, FHA loans, and VA loans for eligible veterans. It’s important to remember that affordability isn’t solely determined by the price of the house; it also hinges on your mortgage terms. Your lender can help you determine the best option that suits your real estate needs and goals.
If you have any questions or need assistance with your home-buying journey, or need help finding a lender, please reach out. I am here to help you on your home-buying journey.
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