Last month, the Federal Reserve increased the short-term interest rate. This will cause a ripple effect throughout the economy, affecting many things from gas prices to how much an American dollar is worth in France. But for people looking to buy new homes, the most significant impact will be higher interest rates on mortgages.
If you’re one of the many people looking to buy a home soon, the Fed’s rate hike may have you worried. But stay calm. December’s hike was only a quarter percent, and while more increases are expected over the year, the impact will be minimal for most buyers.
The people who will feel the effects of higher rates the most are those looking to buy more expensive homes. In the higher price range, a slight increase in rate means a more dramatic increase in monthly payments. So if you fall into this category, increasing rates may reduce the cost of the house you can afford.
But for you dreamers out there, all hope is not lost! There are several things you can do to ensure you land your dream home without breaking the bank in the process:
1. Think longer-term. If you’ve been considering a 15-year mortgage, change gears and look for longer-term loan options. You have to determine what’s more important to you: buying a house you can pay off in 15 years or buying a house that you may like more that requires a 30-year loan.
2. Broaden your search. You may not be able to get into that posh neighborhood of your dreams, but that doesn’t mean you’re stuck in the slums. There are often plenty of great options available with a slightly lower price tag. Prioritize the features you want, and see if they come in a smaller package.
3. Find a better location. Explore different geographical areas. The more closed off you are when it comes to different neighborhoods and longer commutes, the fewer options you have.
4. Consider a larger down payment. If you borrow less money, you can trim monthly payments despite a higher interest rate. Will waiting a few months to move mean you can save more to put toward a dream home? The Fed has emphasized that these increases will continue, but they will be gradual. Do the math, and find the best way to invest.
5. Use your personal connections. Instead of borrowing everything from the bank, borrow from individuals, and pool together a larger cash amount for your down payment.
6. Work with a loan broker. Using a mortgage broker is almost always a better option that going directly to a bank. They know the market, and they’ll save you time and stress while buying (as well as a lot of money throughout the life of your mortgage).
7. Prepare your savings. Even with the rising interest rate, the decision to purchase a home is not one to rush. Consider checking rental properties in the area where you can experience your dream space while saving up to actually acquire it. Rental prices are often lower than most mortgage payments, and this extra cash can be saved to prepare for a larger initial down payment when you’re ready to make the leap.
Higher interest rates can sound like terrible news for people planning to buy homes, but the rate hike isn’t all bad. One effect that works in a homebuyer’s favor is that higher rates often mean banks are more willing to lend their money. So if a home loan has been just out of reach for you in the past, this change might be the opportunity you’ve been waiting for.
Homebuyers should focus less on worrying about the current rates and more on working with people who understand all of the other factors involved in a mortgage. That’s how you’ll save the most money and have peace of mind moving into your new home, regardless of its price tag.
David Adams is the founder of HomeSuite, an online marketplace for temporary furnished housing that uses technology, data, and customer service to provide the best possible experience for tenants and landlords. Connect with David on Twitter.