After hitting historic lows not long ago, interest rates are trending upward. Mortgage rates went above 4% this spring for the first time since 2019. Rising interest rates, high demand, and low inventory make it tough for buyers. And that also means that some buyer strategies are changing. Here, then, is what New Jersey home buyers need to know about rising interest rates.
How Rising Interest Rates Impact Buyers
Here are some of the most important ways rising interest rates will affect New Jersey home buyers . . .
- “You wind up qualifying for a lower loan amount. The amount of a preapproval is based on both your down payment and the monthly payment you can afford based on your debt-to-income ratio (DTI). Because your monthly payment is higher, you’ll have a lower loan amount you can handle.”
- You may find it more difficult to find homes in your price range. Typically, when interest rates go up, sellers wind up lowering prices. But this takes some time, and with demand still high, home prices are likely to remain high.
- Higher interest rates will also mean that your monthly mortgage payment is higher, with a larger share of your monthly budget going to the payment.
- “You should carefully weigh buying vs. renting. Typically, with property values going up as fast as they are, the cost of rent goes up faster than mortgage payments, even with higher rates. However, every market is different, so it doesn’t hurt to do the math for your area.”
New Buyer Strategies
With rising interest rates, some old buyer advice no longer holds, and new strategies are called for.
Get a Mortgage Commitment
Formerly, buyers were advised to get pre-approved for a mortgage before making an offer. Pre-approval gives the seller some assurance that you can get financing and that you are a serious buyer. But now, industry pros say, you should get a mortgage commitment rather than a pre-approval letter.
“A mortgage commitment is granted by an official underwriter. This means that there will be fewer conditions on the buyer’s financing . . . It allows the transaction to move more seamlessly and for the seller to receive their money faster.”
Be aware, though, that this takes longer than pre-approval. “Borrowers typically need to supply all supporting income and asset documents to the lender. Those documents then have to be reviewed and signed off on by a member of the underwriting team.”
Purchase Points for a Lower Rate
In the past when interest rates were low, buyers usually didn’t need to bother with points to lower the percentage of interest charged. But now with rising interest rates, “buying mortgage points is a simple way to lower your mortgage’s interest rate and save money long term. If you have the extra funds at the time of closing, it can be worth it to buy mortgage points . . . This will lower your monthly house payment and save you money long term.”
Here’s how it works. “Points are an upfront fee you pay to get a lower rate over the life of your home loan. Typically, 1 point lowers your mortgage rate by 0.25% and it costs 1% of your loan amount. So if the current interest rate is, say, 4% on a $500,000 loan, if you pay 1 point, or $5,000, upfront, your interest rate will be reduced to 3.75%.” And that .25% can mean tens of thousands of dollars saved over the life of your loan.
Get Down Payment Assistance
Formerly, down payment assistance programs were pretty much for and utilized by first-time buyers. But with today’s tight housing market and rising interest rates, down payment assistance is something many more buyers should look into.
“Buying a home is a huge financial undertaking, especially in competitive markets like the one we’re experiencing . . . Buyers who are having trouble coming up with the cash for their down payment and closing costs should ask their lender about available down payment assistance programs. Often, these programs can help cover those costs by providing grants or other forms of financial assistance.”
Be Budget Conscious on Price
With housing prices still rising and now with rising interest rates, it’s easy for buyers to spend more than they can actually afford. Industry experts advise buyers to work closely with their lenders before making any offers.
“Buyers should have very honest conversations with their lender about what they can and cannot afford,” she advises. “They should make sure to factor in that they will most likely have to offer above each property’s list price. Then, once they have a better idea of what they can realistically afford and they know their limits, they’ll be ready to make a strong offer when they find the house they want.”
The Need for a [marekt_city] Agent
Market conditions are tough for buyers, and interest rates are going up. The upshot is that the services of an experienced New Jersey agent are more critical than ever for buyers. Your agent’s negotiating skills are something you really can’t do without now. If you’re ready to buy and are worried about rising interest rates, be sure to contact us today at 855-966-DEAL.