Mortgage rates and home prices are two key considerations when buying a house, but do they need to decrease before taking action?
Decisions on when and if to buy depend on both your financial preparedness and long-term goals. Mortgage rates likely won’t reach sub-4-percent levels again, as we saw them during 2020-2021.
1. Make Your Down Payment
If you want to purchase a home, experts suggest making at least 10 to 15% downpayment depending on your lender. Doing this can save you money in the long run as interest will be lower and private mortgage insurance won’t need to be paid each month.
Though it can be tempting to wait for the perfect offer, saving for your down payment should be prioritized if you have significant income sources like bonuses, commission checks or inheritance coming your way. Furthermore, having an emergency fund with sufficient savings means less reliance on credit for unexpected expenses.
Mortgage rates should continue to fall this year, though their decrease will not be dramatic enough to warrant waiting until later to purchase their dream home due to low inventory levels and rates reaching these historic lows. We won’t see rates this low again for decades!
2. Shorten Your Loan Term
One way to reduce rates without refinancing is to shorten your mortgage term. Although this will increase monthly payments, it could save significantly in interest costs and speed up equity building processes and help you reach full ownership more quickly.
Before opting for this strategy, it is wise to determine whether you can afford an increased monthly mortgage payment. An unexpected medical emergency, job loss or other financial setback could make meeting this higher mortgage payment challenging.
If you want to shorten the life of your loan without an increased monthly payment, overpayment may be the answer. Most lenders allow additional payments without incurring an extra fee, giving you flexibility to meet other goals or unexpected expenses without straining finances as quickly. This strategy can especially prove valuable during an unpredictable market environment.
3. Buy Points
Mortgage points can help reduce your interest rate, ultimately lowering monthly payments. But they come at a cost; typically one point purchases decrease the rate by about 0.25% – meaning if you were looking for a house with a 7% rate and one point was purchased, that rate could drop down to 5.5%! But up-front costs of purchasing points typically cost $2,000 plus other closing costs.
At times, it may be wiser to save the money that would otherwise go toward mortgage points for making a larger down payment and thus securing a lower interest rate and saving more over time. If you know you will stay in your home long-term and can purchase points to reduce overall cost, however. Do be wary not to sacrifice budgeting and emergency savings when trying to secure lower loan costs – that could spell disaster down the line!
4. Refinance
Refinancing mortgages is most frequently done to reduce interest rates and therefore their monthly payment and total home cost. Refinancing also can help homeowners switch from an adjustable-rate mortgage (ARM) to fixed rate financing or consolidate debt, thus helping reduce overall expenses.
No matter the reason for refinancing, homeowners should carefully evaluate all available options before making their decision. While refinancing may save thousands over the life of the loan, this may not always be feasible or desirable for all homeowners.
Mortgage rates may not be something homebuyers can easily control; therefore, the most effective strategy would be taking steps such as building credit and making a substantial down payment in order to put themselves in the strongest possible position when they’re ready to purchase their house. A higher credit score can also help buyers access better mortgage rates in future by lowering risk exposure with lenders.