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How to Afford a House With Rising Prices and Interest Rates
How to Afford a House With Rising Prices and Interest Rates
In the third quarter
of 2022, the median home price in the U.S. was around $400,000. That means the
average homebuyer required a six-figure income to afford their purchase — and
the $2,682/month payment that accompanied it. If that seems steep, don’t lose
hope. Here are six strategies to help you afford that new home you’ve been
dreaming of when prices and mortgage rates are high.
1.
Choosing a property. There’s an old real estate saying: “Location,
location, location.” And that’s because location is such an important driver of
price and value. While picking a prime location can drive price up, moving a
little further from a city or choosing a less sought-after neighborhood can
help control costs. You can also consider an older home — taking into account the
cost of potential repairs — or one with a smaller footprint. These moves may
also lower your property taxes.
2.
Adjustable-rate mortgages (ARMs). Unlike a fixed-rate mortgage, the
interest rate of an ARM can vary over the loan term. The “start rate,” also
called an intro or teaser rate, is fixed for a predetermined period (such as five
years for a 5/1 ARM), but then can fluctuate according to an index — typically
the secured overnight financing rate, or SOFR, plus a margin. The 1 in a 5/1 ARM
means that the interest rate can subsequently adjust every (one) year. ARMs typically
carry a lower rate than fixed-rate mortgages but carry the risk of going higher
over time. An ARM may make more sense if you’re confident you will sell the
home within the period of your start rate; otherwise you risk not being able to
afford your payments in the future.
3.
Higher down payment. If you can scrape together a higher
down payment, it can lower your monthly payment significantly. And by exceeding
the 20% threshold, you can save even more by dropping private mortgage
insurance, or PMI.
4.
Put time on your side. Real estate deals may be few and far
between in a competitive real estate environment, but you have a better chance
of scoring one if you’re not in a hurry. Allow plenty of time to shop around so
you can take advantage of any lulls in the market.
5.
Negotiate and lowball. It may be a tougher sell in a hot
market, but you still may get lucky by putting in low offers. Consult with an
experienced real estate professional for advice on getting your best chance of
having a seller accept a lowball offer, knowing you may need to make a bunch of
them before someone bites.
6.
Get preapproved. Do what you can to make your offer more
attractive by getting your financing preapproved by your lender. If a seller
needs more time to get out of their home, you may be able to contract to let
them stay and rent it out from you. Waiving contingencies comes with risks, so
don’t do this without careful consideration.
Buying a home is one of the biggest purchasing decisions anyone ever makes. A consultation with a qualified financial professional can help you weigh your options.
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