How to Manage High Interest Rates’ Impact on Your Home Search

June is National Homeownership Month, emphasizing the importance of making the dream of homeownership attainable.

Many potential homebuyers have been sidelined in recent months, however, due to elevated interest rates and rising home prices.

While the Prime Rate has increased borrowing costs for lending products like credit cards, mortgage interest rates are more heavily influenced by the bond market and the 10-year Treasury yields. With that in mind, here are tips to help you manage the impact of higher interest rates on your home search.

Get Your Ducks in a Row

Trying to time a drop in mortgage rates with the purchase of your new home is unlikely and may even result in increased competition as rates lower, so stay focused on what you can control.

One area you can control that can help reduce the interest you will pay on your new home is by building a larger downpayment. Using a larger downpayment will reduce the amount you need to borrow, which can lower your monthly payments and potentially the interest rate. Putting 20% down can also avoid the need for private mortgage insurance (PMI), which can be another added expense in your homebuying journey.

You will also want to work with your lender to get pre-qualified and pre-approved so you’re ready when the right home becomes available. Pre-qualification will help give you a rough estimate of how much you may be able to borrow, while pre-approval is a more thorough step in the process requiring more documentation to determine how much house you can afford.

Consult Your Homebuying Team

Having a strong homebuying team in place can help ensure a smooth process from start to finish.

Work closely with your lender to understand the types of loans that are available to you and what might be most beneficial for your financial situation. Your lender can help you weigh your options, like if a fixed-rate mortgage makes the most sense or if an adjustable-rate mortgage could be a fit.

Government-backed loans, like Veterans Affairs (VA) loans, can also provide more affordable options for those who qualify. Your lender can also help identify federal, state and local grant and other programs that you may qualify for – in addition to affordable mortgage programs the lender may have – which in some cases can be stacked to help reduce downpayment and closing costs to make homeownership more accessible.

Staying in close contact with your lender can also help you determine whether buying points to reduce your interest rate is worthwhile as well as when is the best time to consider locking in your rate during the processing period.

Understanding and communicating your goals and financial situation will help you have informed discussions with your homebuying team to find the best loan for your needs and ensure the process goes smoothly.

Build Your Dream Home

Building your home can be more expensive, though that gap has narrowed with rising prices on existing homes, but can also provide more cost and timeline certainty.

Existing homes can come with costly remodels, repairs and more for older portions of the house or areas you just want to put in your own style. By working with a home builder, you can have the floorplan and home configuration built to your preferences so you’re ready to move in on day one once construction is complete.

Expanding your home search area or looking for houses that might need some work are also options that can help you find a home while staying on budget. Working closely with your lender and real estate agent, you can evaluate your various alternatives and put a plan in place to help land your dream home.