Buying A Home When Mortgage Rates Are Rising

How to Make Your Monthly Mortgage Payment Affordable

For many Americans, the economy is keeping them from buying or selling a house. I get it. The news reports are alarming, confusing, and negative…the bad news seems to be on repeat!

Interest rates are rising, goods and services are more expensive (hello grocery bills!), and we’re seeing higher 30-year fixed mortgage rates than we got used to during the pandemic. 

But here’s the thing. There are several ways to work around the current mortgage rates and get a more favorable monthly payment. 

Make a larger down payment. 

This option boils down to simple math. The more you put down on your home purchase, the less money you have to borrow. As a result, your monthly payments will be lower. For every $1,000 you put down, it will lower your mortgage payment around $7 per month based on current rates. If you can put 30% or 40% down, your monthly out-of-pocket will be less. This is an excellent way to make your new mortgage more affordable, especially when the rates are higher than your current rate.  

Temporarily buy down the interest rate. 

This is an effective way to reduce your Principal & Interest Payments for a few years. It’s so effective that Rocket Mortgage calls this technique an “Inflation Buster.” 

“Borrowers can select a 3-2-1 Buydown, a 2-1 Buydown, or a 1-0 Buydown,” explains Paul Knopf with Interlinc Mortgage. “Here’s how the temporary buydown works, using a 2-1 Buydown and a 6.875% note rate as an example,” Knopf explains. “Year one, the interest rate is reduced by 2%, meaning the payment is based on a 4.875% rate. Year two, the interest rate is reduced by 1%, so the payment is based on a 5.875% rate. Finally, in year three and beyond, the interest rate reverts to the actual note rate of 6.875%. Now, let’s put this into an actual savings example: For a $250,000 loan, year one your principal and interest payment would be $1,323 per month. Year two, the principal and interest payment would increase to $1,479 per month. Finally, in year three and beyond, it would go to $1,642 per month. You just lowered your payment to $319 per month in the first year and $163 per month in the second year! This unique program is the perfect option to battle inflation and buy yourself time for the interest rates to come back down to a refinance friendly market. Most experts expect this to occur within the next 8-18 months depending on which source you follow,” says Knopf.  

“Buyers cannot pay for the costs involved in this program, as they are concessions that must be paid by the seller or lender,” Knopf adds. “The funds are put into an escrow-like account to subsidize what the borrower pays versus the actual amount due. If the mortgage rates drop and the borrower chooses to refinance, any amount remaining in the escrow account will be applied as a principal reduction on the payoff statement, so no money is lost.” 

Shop around for the best loan type for you. 

There are many types of loans available to buyers. Conventional loans (30-year fixed, 20-year fixed, 15-year fixed, and 10-year fixed), adjustable-rate mortgages (ARMS), and government loans (including FHA, VA, and USDA loans). Conventional loans come with the fewest contingencies, but government loans might be good choice for some buyers because they require smaller down payments and allow for lower credit scores and higher debt to income ratios. For those with little no savings, a down payment assistance loan is a great option for those that qualify.   

Find a qualified mortgage lender who can help you evaluate all your choices so that you make the decision that’s right for your wallet. 

Pay off debt and raise your credit score. 

This is easier said than done, but the importance of this cannot be overstated. The higher the credit score, the better the mortgage rate on most programs. In some cases, a lower debt-to-income ratio can help you qualify for better loan options. Be mindful about paying down your debt, however you can do it. As Susie Orman told Oprah.com, “you do it one day at a time.” She recommends that “even paying an additional $20 a month (on credit card debt) will allow you to eliminate your balance more quickly, which will boost your credit rating.”  

If you can’t cut your debts, limit your spending and don’t’ add to it. Pay cash when you can and use your credit card only when you must (and can pay the bill in full at the end of the month). 

Special thanks to Paul Knopf, Interlinc Mortagage, for his help with this article.