With interest rates rising, many prospective homebuyers are looking for ways to secure an affordable mortgage. According to reports, the median price of an American home was $392,000 at the end of 2022, with projections showing a slight decrease to $380,000 by the end of 2023. Although the current economic climate is in flux, there are some things prospective homebuyers can do to secure the best deal in a rising-interest market.
Understand your credit score
Your credit score is one of the most important factors when it comes to securing a mortgage. Individuals with higher credit scores have an easier time getting more favorable rates than those with lower scores. Make sure you review your credit report and ensure there are no errors on your report that could negatively impact your score.
Shop around
Don’t settle for the first mortgage you are offered. Take time to compare different rates and terms from various lenders to better understand market trends. See what local banks and credit unions offer, as they sometimes offer more competitive rates than larger lenders. Additionally, if you work in a specialized field, you may be able to secure a mortgage with a lender that offers particular terms to individuals in those fields. For example, if you are a doctor, you may be able to secure a physician mortgage. Physician mortgage loans are specialized loans for physicians, dentists, and other medical professionals that offer specific loan conditions based on their professions. As they provide more flexibility than conventional loans, it may be worth looking into.
Get pre-approved
Getting a preapproval letter from a lender can give you leverage if you are actively looking at houses and ready to start making offers. Prospective homebuyers who are pre-approved for a mortgage not only have an idea of what they can afford but also have more negotiating power when making an offer on a house. It shows lenders and sellers that you’re serious about buying a home and could help you stand out among prospective buyers. Furthermore, getting a pre-approval locks you into the interest rate offered at the time of the pre-approval letter for 90 to 120 days, depending on the lender.
Put more money down
Putting more money towards a down payment may enable you to secure better mortgage terms. Many lenders require a down payment of at least 20% to avoid PMI, a type of insurance the lender adds to the mortgage note as protection against non-payment. PMI is calculated according to your loan amount, potentially adding hundreds of dollars to your monthly payment until you have repaid 78% of the original value of your home or reached the mortgage’s midpoint (for example, at year 15 of a 30-year mortgage). Additionally, putting more money down may help you secure a lower interest rate as it reduces the risk for the lender.
Consider an ARM loan
If you plan to move within the next few years, an Adjustable-Rate Mortgage (ARM) loan may be an attractive option. However, this option should be considered with caution as the rates with ARMs fluctuate with specific performance benchmarks, so it can either work in your favor or leave you with higher payments. However, when done right, an ARM loan can offer lower rates than a traditional mortgage and potentially save you money if it’s kept for a short time.
Overall, getting a mortgage with favorable terms can be challenging in a rising interest market, but there are some things you can do as a prospective homebuyer to help yourself. Understanding your credit score, shopping around, getting pre-approved for a mortgage, putting more money down, and considering an ARM loan are all things you can do to help set yourself up for a good outcome during the homebuying process in this type of environment.
