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The Impact of Rising Interest Rates on Home Affordability:
Tips for Homebuyers in 2024

by Mike Selner

The past few years have been a bit rough for buyers in the housing market. Between low inventory, increased selling prices, and a recent surge in cash buyers and investors, the housing market is already difficult. But now, rising interest rates have compounded all of those issues. I want to dive into exactly how this all works and pass on some tips and recommendations that I can give you as a homebuyer working with high interest rates and a competitive environment.

Plain and simple – when mortgage interest rates are rising, it means that homebuyers and prospective homebuyers will need to plan on having a higher monthly payment for their housing than under normal circumstances. rates and prices are still high, recently hitting record highs, causing mortgage applications to reach all-time lows for the last three decades. While you can’t change the mortgage rates, you can navigate the challenge and work around it as much as you can. Here are some ideas to succeed as a buyer in today’s high-interest housing market:

  1. Make a larger down payment

    One of the most surefire ways to bring your mortgage rate down as a homebuyer is to put down a larger down payment. Instead of putting down 3% on the house, think in terms of double digits and target 20-30%. By paying 20% or more of the total price of the house on the down payment, you may be able to avoid private mortgage insurance and the extra cost associated with it. Furthermore, you may be able to drive down the monthly cost of your home by a full percentage point or more. Make sure you work with your lender and the home seller to understand the down payment terms of your mortgage in extreme detail.
  2. Consider an adjustable-rate mortgage (ARM)

    If you plan to own your home for a period of 5-10 years or less, an adjustable-rate mortgage might be the right step forward for you. ARMs can be risky, but they almost always tend to have lower interest rates throughout the initial period, even when interest rates are generally high. By taking on an adjustable-rate mortgage, you might be able to weather the storm a bit and make it through a period of high interest rates paying something closer to what you would under normal circumstances. However, it’s important to always be aware that this period of low rates typically will not last past the initial period, so be sure that you are in a position to adjust accordingly when that initial period ends.
  3. Consider a 20- or 15-year fixed rate mortgage

    One way to guarantee that you will pay much less total interest on a mortgage is to commit to a short term, fixed-rate loan. Although you are effectively signing up for higher monthly payments, you are also saving yourself potentially tens or hundreds of thousands of dollars in interest by shortening the loan term. This is a solid option for homebuyers who are able to pay higher monthly payments in order to avoid a buildup of interest in the long term.
  4. Work with a local community bank for personalized solutions.

    In the realm of mortgage lending, larger banks and online lenders often dominate the conversation. However, overlooking the resources and personalized attention offered by local community banks can be a missed opportunity, especially in navigating a challenging housing market.

    Community banks typically have deeper roots in the neighborhoods they serve, fostering relationships with local businesses, residents, and real estate professionals. This local knowledge can translate into more tailored solutions for homebuyers, especially when facing rising interest rates and competitive market conditions.

Here’s how working with a local community bank can benefit you:

a. Personalized guidance: Community bank loan officers often have a vested interest in the success of their clients. They take the time to understand your unique financial situation, goals, and challenges. This personalized approach can result in more tailored mortgage options that align with your needs and circumstances.

b. Flexibility in lending criteria: Unlike larger financial institutions that adhere strictly to standardized lending criteria, community banks may have more flexibility in their underwriting process. This can be particularly advantageous if you have unconventional income sources or credit challenges. Community banks may be more willing to consider alternative forms of creditworthiness, such as rental payment history or employment stability.

c. Local market expertise: Community bankers are intimately familiar with the local housing market dynamics, including trends in home prices, inventory levels, and neighborhood desirability. Leveraging this insider knowledge, they can offer valuable insights and guidance to help you make informed decisions about your home purchase. Additionally, their understanding of local appraisers and real estate agents can facilitate a smoother transaction process.

d. Relationship-based approach: Community banks prioritize building long-term relationships with their customers. By choosing a local community bank for your mortgage needs, you’re not just securing a loan – you’re establishing a partnership. This relationship-centric approach often extends beyond the initial mortgage transaction, with opportunities for ongoing financial guidance and support.

The housing market can be intimidating to a buyer, especially in today’s environment marked by high interest, high selling prices, and high competitiveness. With that being said, if you are intent on buying a home, it’s worth your time to consider alternative strategies and options available to you. Think about a larger down payment, consider alternative mortgage types (like ARMs or short-term ones), and utilize the homebuying assistance programs available to you.