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Strategies for Buying a Home When Prices and Mortgage Rates Are High

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In December, Alexandra Lewis and her fiancé Kevin Cawley learned that the rent for their apartment in Alexandria, Va., would go up from $1,900 to $2,300 a month in February. It was just too high, said Lewis, a social worker. The rising rent prompted her and Cawley, a DC government employee, to consider buying a house.

Although she expected mortgage rates to be around 2% – a friend had secured a mortgage around that rate at the start of the pandemic – Lewis was shocked at how much the rates had increased.

“I think the market was just going up and down and we ended up locking in a day where it was at 4.6%, unfortunately,” Lewis, 26, said.

Lewis may have been disappointed at 4.6%, but rates continued to rise. The latest survey by Freddie Mac puts the average for a 30-year fixed rate mortgage at 5.89 percent. Rates are only slightly above the historical average of 5.07%, according to the Mortgage Bankers Association (MBA).

According to National Association of Realtors (NAR). House prices remain high but have started to decline. The June Case-Schiller index showed prices were up 18% year-on-year, but were up 19.9% ​​in May. Lawrence Yun, NAR’s chief economist, said the housing market is in recession in terms of declining sales and construction.

All of this makes finding a home more difficult for first-time buyers, but not impossible. Lewis and Cawley had savings and good credit going to them. Plus, they compromised on a second-best location where their money stretched further. They also tapped into additional funds through a home ownership program.

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“The concept of affordable housing is one that seems like a huge challenge for potential buyers these days,” said Mark Hamrick, senior economic analyst for Bankrate.com.

Mortgage bankers and real estate agents advise clients that just because you can afford a house doesn’t mean you have to spend so much.

“I try to advise clients not to be housing poor,” said Wendy Banner, an associate broker at Long & Favor in Bethesda, Maryland. “Salary increases are not automatic. People are more reluctant to buy what they might do in the future.

Banner suggests setting a budget based on what a buyer is comfortable spending on housing each month.

“Monthly mortgage payments for a typical American home have increased by more than $400 since January. Those who are serious about buying are forced to carefully consider their budgets,” said Jonathan Lee, vice president of Zillow Home Loans.

Here are some strategies buyers can use:

  • Make a list of must-haves and must-haves. “You’ll never get 100% of what you want,” said Tania Tinsley Little, a broker with eXp Real Estate in Raleigh, North Carolina “Aim to get 65-70% of what you want.”
  • IImprove your credit ratings. A better score can reduce the cost of borrowing money. “Check your credit score before you start,” Hamrick said.

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  • Meet more than one lender. “Talk to a lender first,” said Susan Sonnesyn Brooks, a DC-based agent with Real estate agents Weichert, which represented Lewis and Cawley. “Before you go to see this house, see if you are qualified.” Lewis and Cawley prequalified with a lender before looking for homes. Although they were prequalified for a $500,000 mortgage, they limited their search to properties listed up to $420,000. “We didn’t want to go all out,” Lewis said.

MBA economist Joel Kan suggests getting your documents in order, such as tax returns, tax returns, bank statements and pay stubs. “Get everything you need to complete this loan,” he said.

  • Check how long a house has been on the market. Overpriced homes tend to stay on the market longer. The longer a home stays on the market, the more likely a seller is to accept a price drop. “The days on the market have gotten a little longer,” Little said.
  • Adjust your expectations. Lewis and Cawley were looking to buy a house in Montgomery County. But homes in their price range — up to $500,000 — were either too small or needed too much work. A four-bedroom, two-bathroom home on the market for $382,000 in Hyattsville, Md., a town in Prince George’s County, was more what they were looking for, even if the location wasn’t. . “It kinda felt like my childhood home, two stories up on a hill,” Lewis said. “It pulled a chord with me.”
  • Discover home ownership programs. The lender used by Lewis and Cawley, Movement Mortgage, told them about a Maryland Mortgage Program called 3% flexible loan, which comes with a down payment assistance loan equal to 3% of the first mortgage. Their total down payment was $25,000, $15,000 cash and $10,000 from the Maryland program. Although their monthly mortgage payment of $2,616 is more than their rent would have been, “why would we continue to rent when we could buy something and build equity,” Lewis said.
  • Make a larger down payment. Larger down payments can lower your interest rate. “A lender looks at the risk,” Yun said. “A bigger down payment means less risk. You may be able to negotiate a rate a quarter of a percentage point lower.”
  • Apply for financial assistance. Ask a relative to lend you or provide you with down payment funds. Find someone to co-sign your loan. If you’re single, have a parent or grandparent co-sign the loan, Little said. You might get a better mortgage rate.
  • Pay points to lower your fare. A point is a commission paid to a lender equal to 1% of the loan amount. Sometimes that makes sense, but it depends on how much the upfront cost will lower your mortgage rate and how long you intend to live in your home, Lee said.
  • Consider an adjustable rate mortgage. An adjustable rate mortgage (ARM) can have a slightly lower rate than a 30-year fixed rate, Kan said. If you plan to sell the house before your mortgage is reset to a higher rate, this may be an option. But beware, if rates are higher when you reset your loan, it can be costly, creating a higher monthly payment. Some ARMs adjust every six months after the initial lockout rate and some don’t have an increase cap, Banner said.