The past few years have been challenging for prospective home buyers hoping to close on their dream house. The lack of housing inventory has created fierce competition, a preference for cash buyers, and expectations for relatively high down payments.
First-time home buyers have struggled to balance market pressures with finding a home within their budget. Several years of interest rate hikes and high 10-year treasury yields have created the highest mortgage rates in two decades.
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High mortgage rates diminish buying power and increase monthly housing payments, creating market uncertainty for those hesitant to commit to a long-term purchase.
We spoke with Ralph McLaughlin, senior economist at Realtor.com, to discuss how homeowners can still find a home within their price range, even in a high-interest rate environment.
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Explore different mortgage options and buydown credits
High mortgage rates can be offputting for homebuyers, especially those looking to purchase their first home. While getting a low mortgage rate would be ideal, consumers have more power than they think in securing a competitive rate.
Mortgage rates will inevitably come down at some point, so the most straightforward option is to close on a house — within budget — and plan to refinance the mortgage in a few years when rates drop.
However, there are a few other options home buyers can pursue now to get a lower mortgage rate.
Mclaughlin notes that consumers should feel comfortable shopping around for different mortgage terms and adjustable rates.
“Homebuyers should look at other mortgage options,” he said. “15-year mortgages come with lower mortgage rates, sometimes 1 to 1.5 percentage points. One of the advantages is that you pay down your mortgage in half the time, but the payment is not double because of how amortization works.”
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“Many home buyers think their payment will double if they get a 15-year mortgage versus a 30-year mortgage. That's not the case at all – in fact, that payment typically will only be 50% to 60% higher."
Adjustable rate mortgages are another way to beat high mortgage rates, though home buyers should weigh the pros and cons before committing.
“Adjustable rate mortgages typically come with lower mortgage rates — even rates that are even lower than 30-year mortgages, and lower than or on par with 15-year mortgages,” McLaughlin explained. “So there’s an advantage, but the disadvantage is that they will not adjust typically for five or seven years. If rates go down lower than your adjustable rate in five or seven years, then you will have to refinance.”
Buydown credits are a less utilized option, but they can help buyers secure a home at the right price—especially if the seller is keen on closing the deal. The seller pays the credits, which essentially subsidize part of the buyer’s mortgage for the first few years.
“Buyers can negotiate with the seller with a buydown credit. It's not uncommon, especially for sellers that really need to unload their home, to ask for an upfront credit from the seller to buy down your mortgage rate,” he said.
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“When you're applying for a mortgage, you would have the option to lower your rate from 7% down to 6% by prepaying some of the interest upfront,” McLaughlin explained. “It's not uncommon to ask sellers to pay and buy that rate down for you, especially in high-rate environments.”
Improving your finances can have a big payoff
A direct strategy — and one buyers should consider when saving up for a down payment — is to improve their financial standing to ensure they’re offered the most competitive mortgage rate from lenders.
“Buyers can also work on improving their personal financial situation to the point where they get the best rate possible,” he said.
“We did a study that looked at what moves the mortgage rate needle, and it turns out things like improving your credit score, increasing your down payment, reducing debt, will all get you better rates than the average advertised rates out there.”
Realtor.com found that working on those four key factors—shopping around with different lenders, improving credit score, paying down debt, and increasing the down payment — can lower a buyer's mortgage rate by 1.5%. On a $500,000 home, that can mean a savings of $400 per month, which can make a big difference to first-time home buyers.
“There is quite a bit of rate variation for identical borrowers depending on which lender you go to,” McLaughlin highlighted. “So hopping around and improving your credit score can have a bigger payoff than most buyers realize.”
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