If you're considering purchasing a home, it's important to prepare for the possibility of rising mortgage rates. While the future remains uncertain, experts forecast an increase in mortgage rates this year, aimed at curbing the surging housing demand. Real estate experts note that home prices rose by approximately 10 percent in the first quarter of 2021, ending the year with an overall increase of 18 percent. Although the rate of growth has slightly slowed, it continues to rise steadily. Additionally, the evolving landscape of flexible work options has influenced housing preferences in new and different ways. In light of these factors, it's essential to understand how rising rates can impact your homebuying journey and explore effective strategies to safeguard your purchasing power.
Determining Mortgage Rates
Mortgage rates are determined as a percentage of the loan amount. Generally, the longer the mortgage term, the higher the interest you'll pay over the loan's lifespan. There are two main types of mortgage loans: fixed-rate and adjustable-rate mortgages. With a fixed-rate mortgage, the interest rate remains constant throughout the loan duration, while an adjustable-rate mortgage allows the rate to fluctuate after a specific period, leading to potential changes in your monthly payment.
Effective Strategies for Dealing with Rising Mortgage Rates
Opt for a Larger Down Payment: While a low-down payment option may make homeownership more accessible, a larger down payment can help offset the impact of increasing rates. A higher down payment provides greater equity in your home from the outset and may eliminate the need for Private Mortgage Insurance (PMI), resulting in reduced monthly payments.
Consider Paying Discount Points: Another strategy is to use discount points to reduce your mortgage rate. This option is particularly advantageous for homebuyers planning to reside in their homes for an extended period. However, it's worth noting that paying discount points will increase your closing costs.
Secure a Rate Lock: By locking in your interest rate early in the transaction, you can ensure that it won't rise during the loan process. This approach provides a more relaxed timeline for home shopping. At Crosscountry Mortgage, our RateSafe program guarantees a fixed rate for 90 days, and if rates decrease, you have the option for a one-time "float down."
Improve Your Credit Score: Irrespective of your loan type, a higher credit score generally results in a better mortgage rate. To enhance your score, review your credit report for any outstanding balances. Federal law grants you the right to obtain one free credit report annually from each of the three major reporting agencies. Additionally, aim to settle any outstanding balances promptly and make timely monthly payments. Familiarize yourself with the five factors influencing your credit score.
Explore Refinancing Options: If you're concerned about rising rates, refinancing your mortgage terms could be a viable solution. Various refinancing options exist, each with its own advantages and disadvantages. If you have an adjustable-rate mortgage and want more consistent monthly payments, consider refinancing to a fixed-rate mortgage. Alternatively, you can explore refinancing to a different adjustable-rate mortgage with revised terms.
Know Your Budget: It's crucial to establish your budget before embarking on the homebuying process, regardless of whether it's your first home, a vacation property, or a rental unit. Meeting with a Mortgage Advisor will help you set realistic expectations and position yourself for success.
Taking a Broader Perspective on Mortgage Rates
When evaluating the mortgage interest rate you're likely to encounter, it's essential to consider factors beyond the national economy. The rate you pay is just one component of your annual percentage rate (APR), which provides a more comprehensive view of borrowing costs. Your APR encompasses the interest rate as well as other charges, such as mortgage points and associated fees specific to your loan. Personal financial aspects, including your credit score, also impact your APR. When you're ready to purchase a home and have concerns about rising mortgage rates, it's advisable to consult with a local Mortgage Advisor. They can guide you in finding the most suitable loan option based on your current circumstances.
To learn more about rates and their potential impact on your homebuying journey, our goal is to equip you with the tools and confidence you need to take control. Contact your local PacRes branch today. At Crosscountry Mortgage, we are dedicated to serving you.
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