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Pandemic-related consumer issues began with toilet paper shortages and evolved into record house prices, leaving would-be buyers scrambling to find an affordable home.
In addition, the supply of homes for sale has reached its lowest level in five years, with only one month’s supply available according to Redfin. So if no more homes came on the market and people continued to buy at the same rate, the current supply of homes would completely disappear within a month. In addition, the Federal Reserve plans to raise interest rates from historic lows several times this year.
This leaves a bleak picture of fewer and more expensive homes available for purchase and more expensive financing. This sentiment is reflected in the January 2022 Fannie Mae National Housing Survey, where a record 26% of consumers survey think now is a good time to buy a home.
However, there are several things consumers can do to give themselves a chance to secure a home without having to pay significant mortgage interest.
Select details on how we got here, the current state of interest rates, and what the experts say you can do to be a competitive buyer.
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How we got here and where things are heading
As the economic shutdown took hold in March 2020, the The Federal Reserve cut interest rates to virtually zero almost overnight. In February 2020, the interest rate was around 1.5%. Two months later, it was 0.05%.
Fed actions have contributed to a steady decline in mortgage rates, where the average 30-year mortgage rate bottomed out at 2.65% in January 2021. Since then, the average mortgage rate has climbed to 3.56% to January 21. rate before the first closings and reaching a 22-month high. And it doesn’t look like they will be slowing down, as several members of the Federal Reserve have said they are planning three interest rate hikes to combat inflation rates not seen in more than 40 years. However, no final decision has yet been made.
Josh Westreich, branch manager at US Mortgage of New Jersey, told Select that it’s “doubtful that rates will slow until the [Federal Reserve] makes a decision.” He added that the only two factors behind the spike are “speculation and uncertainty.”
Mortgage rates and interest rates set by the Federal Reserve are closely tied to each other. As the Fed cuts and raises interest rates, mortgage rates will generally follow. Additionally, rates tend to oscillate as the 10-year Treasury yield rises, and it is currently approaching pre-pandemic levels. But each lender may offer different rates to customers depending on their level of risk and the types of customers they decide to serve. But in this case, the banks raise their rates in anticipation that the Fed will do the same.
And while borrowing money for a home has historically been cheap throughout the pandemic, home prices haven’t reflected that. Due to a lack of housing supply and record high mortgage rates, home prices have skyrocketed since March 2020. In the first quarter of 2020, the median home sale price was $329,000. In the third quarter of 2021, it was $404,700.
In summary: housing has become extremely expensive and the cost of borrowing to buy a home is rising rapidly, with no signs of slowing down. So how can you guarantee a favorable interest rate in this difficult environment?
How Consumers Can Get a Low Interest Rate
While economic factors are beyond consumers’ control, Westreich thinks homebuyers can still improve their chances of getting a lower interest rate because mortgage rates “are determined for the most part based on two factors: credit rating and net worth/down payment.”
He strongly advocates saving as much as possible for a down payment while simultaneously working to improve your credit score. He told Select that consumers should “repay all revolving debt to 30% of the credit limit and try not to open or close an account.” Essentially, you need to keep your credit utilization rate low and avoid opening or closing new credit cards or loans before applying for a mortgage.
Tara Falcone, CFP and founder of Reason, the goal-oriented investing app, reiterates Westreich’s mantra, adding that consumers need to think and prepare carefully before buying.
“It’s important to focus on the total purchase price rather than the monthly payment,” she said. It can be tempting to buy a home you qualify for, but even if you lock in a low interest rate, being “housing poor” (meaning a majority of your income goes to the expense of your home ) is not a recommended strategy.
And like any other financial decision, Falcone recommends consumers take the time to shop around for the best interest rate.
“Get mortgage lender recommendations from people you know and trust in your area,” Falcone said. “Talk to everyone from banks to online mortgage lenders and be sure to do your own rate research beforehand.”
So to get the lowest possible mortgage interest rate: improve your credit score (keep your credit utilization rate low and don’t open and/or close new accounts), save for a solid down payment and shop around for the best rate.
How to prepare for buying a house
Saving for a down payment on a house and Improving your credit score are two long-term personal financial goals, but you can always take steps to start today.
First, consider using a credit monitoring service, like Experian or IdentityForce. Many of these services are offered free of charge by several financial institutions and can help you understand the factors that affect your credit score. And if you see anything that may be incorrect or negatively affecting your score, you can take a proactive approach to fixing those issues.
Additionally, you may want to sign up for a high-yield savings account to put money aside for a down payment. Although the interest rates on these accounts remain low, every dollar you can earn in interest will bring you closer to your goal of buying a home. It’s not advisable to keep your money in a checking account because there’s virtually no interest to accrue, and investing the money is probably too risky because you don’t want market volatility to affect the ability to to buy a house. However, some robo-advisors, like Wealthfront, will create a low-risk portfolio for you based on when you want to buy a home.
Finally, consider setting a budget for yourself. It’s not an exciting task, but it’s a fundamental part of your financial journey to buying a home. By setting a budget that takes into account how much you can save each month for a home, you can begin to predict when you will have enough funds for a down payment.
At the end of the line
When it comes to buying a home, many factors are beyond your control. But, there are still things you can do to make the home buying process easier, like improving your credit score and having a bigger down payment. While it’s important to watch market trends and understand what’s going on, focusing on the noise can sometimes be overwhelming and counterproductive.
Putting yourself in the best possible buying position by improving your financial situation will help you secure favorable terms for your mortgage and make home ownership a little more affordable.
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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.