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Inflation may be slowing down, but not quickly enough for the Federal Reserve. At the beginning of May, the Fed again chose to keep rates where they are, a signal that mortgage rates in the 7% range will continue to be the norm.
Meanwhile, homeowners across the United States are locked into low-rate mortgages, disincentivized to sell. Housing stock throughout much of the country remains low as a result. But interest in real estate hasn’t abated, and professional investors, first-time buyers, and everyone in between are faced with the question of how to buy a house with high interest rates as the standard for the foreseeable future.
The truth is that every housing environment presents unique challenges. Today’s prospective buyers should not feel too discouraged. In this guide, we’ve captured some key tips for real estate investing with high interest rates in the mix.
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How to Afford a House With High Interest Rates: Ten Tips
1. Investigate assumable mortgages.
Though this strategy will not work for everyone, some house hunters may benefit from taking over assumable mortgages in a high-interest rate environment. While most conventional mortgages cannot be assumed, some—particularly those backed by the FHA, VA, USDA, or other government agencies—can be passed from the seller to the buyer.
Buyers have the potential to benefit from assumed mortgages because they stand to inherit loans with lower rates. There are stipulations to consider, however. Assumed mortgages typically require lender approval, and in the case of government-backed mortgages, there are several eligibility requirements. Regardless, it’s a possibility to keep on your radar while you hunt for a house.
2. Consider adjustable-rate mortgages and longer-term mortgages.
Today’s buyers should also consider adjustable-rate mortgages (ARMs). The interest rate on an ARM, or variable-rate mortgage, is not fixed. It often allows for a buyer to take advantage of the lowest possible interest rate at the time of purchase, but the rate is liable to increase over time. This, of course, translates to monthly payments that could increase in the future.
An ARM can be a great option for those looking into buying a house with high interest rates plaguing the market. In a few years time, if your monthly payments increase, you may be in a position to sell and move into a new home, or you could investigate refinancing and transition to a fixed-rate mortgage.
Another consideration is a longer-term mortgage, which is more likely to allow for lower monthly payments, helping you save money in the short term. The total amount paid in interest over the long term may be greater, but again, refinancing is an option if and when mortgage rates come down.
3. Determine your eligibility for government loans.
Many U.S. government agencies insure loans for homebuyers. These agencies include the Federal Housing Authority (FHA),Department of Veterans Affairs (VA),United States Department of Agriculture (USDA),and others.
Eligibility requirements tend to be stringent. Applicants usually need to have American citizenship, plan to use the loan to purchase a primary residence, and report an income that doesn’t exceed a certain level. Some government-backed loans are reserved for first-time buyers as well. But if you qualify, it’s possible that you will be able to secure an interest rate that is lower than average—a boon in today’s market.
4. Look into seller financing.
An unconventional housing market demands unconventional strategies for house hunting. Seller financing, a situation in which the seller essentially acts as the lender instead of a bank, is somewhat uncommon, but potential buyers shouldn’t discount the possibility.
Seller financing has its pros and cons. There are fewer regulations, which on the one hand can expedite a sale but, on the other, leave either or both parties vulnerable. But if you do your research, you may be able to find a great deal on a property and negotiate a more reasonable interest rate.
5. Relentlessly hunt for a good deal.
Today’s seller’s market requires more proactive buyers. Housing stock is low, and available properties may have inflated prices. Interested buyers can and should pursue alternative avenues to find homes for sale.
Inquire with your agent about properties that might be listed off the market. Expand your search radius. Cold call or write to property owners and wholesalers to see if they are interested in selling. These strategies boil down to putting in the legwork to find homes that the majority of house hunters don’t have on their radar.
6. Put more money down.
Homes are expensive, and simply putting more money down isn’t always a viable option for buyers, and especially for first-time buyers. But it’s worth reiterating that a larger down payment can allow for better interest rates and lower monthly payments.
If you can’t justify spending more money on a down payment, you can also consider using the same amount to place a down payment on a less expensive home.
7. Consider a property’s future potential.
Sometimes it helps to see not just what a home is but what it can be. Maybe you’re shying away from a property because it’s too small or somewhat distressed, but renovation is always a possibility. You can secure an affordable property now with reasonable monthly payments, then improve the home over time with piecemeal updates.
Several weekends of DIY projects can quickly increase your home’s value and curb appeal. Also, if you’re not financially stressed month to month with high mortgage payments, you may be able to put aside money to pay for an addition or remodel a few years down the line.
8. Get preapproved for a mortgage.
Set yourself up for success as a homebuyer. Organize your finances and boost your credit score to improve your mortgage approval rates. Gather your proof of income, past tax returns, and other essential mortgage documentation. Then reach out to mortgage lenders for mortgage prequalification. When you’re financially prepared to buy, you can begin the preapproval process to communicate to sellers that you’re serious and ready to make an offer.
Bear in mind that mortgage preapprovals can expire, so you may have to restart the process after a few months if you’re still searching for a home.
9. Research a variety of mortgage lenders.
Not all banks and mortgage lenders will offer the same rate. When you begin to apply for a mortgage, consult with several lenders to find the best rate possible. You may find yourself in a position to negotiate a lower rate if you receive competing offers.
10. Look for sellers incentivized to close.
It’s not just buying a home that’s expensive. Selling a home is costly as well. A finalized sale offsets the expenses, of course, but a home on the market for too long can depreciate in value, eating into the seller’s potential profits.
Look for motivated sellers. Consider homes that have been on the market for a while, or ask your agent about sellers who are otherwise eager to offload their property. You might find it easier to negotiate a mutually beneficial deal with a seller who is ready to close.
When You Find Your New Home…
Sometimes it’s easy to be so focused on finding a home that you neglect to think through what you’ll do when you actually close on one. It’s common for buyers to find themselves financially strained after all the expenses associated with moving into a new home, and this is especially true in a market with hot home prices and high interest rates.
You might find a little peace of mind with home warranty protection. This ensures that if one of your appliances or systems develops an issue shortly after you move in, you can have the problem resolved quickly and affordably.
Homebuyers can pursue home warranty protection on their own, though it’s not uncommon for sellers or realtors to transfer coverage to a home’s new owners. In fact, real estate agents have increasingly embraced home warranty coverage to generate interest in properties and better support their clients.
Whether you’re an eager homebuyer, seller, or realtor, reach out to Liberty Home Guard’s knowledgeable team at (833)-566-9564 to learn more about the home warranty process and how it can support you as a homeowner or real estate professional. Our plans are unparalleled in the breadth of coverage options, so you can be sure that you’ll find that custom-fit policy.
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