5 Ways to Buy a Home When Mortgage Rates Are High

While current mortgage rates - just above 6.42% for a 30-year fixed rate mortgage - are below the historical average, paired with hefty listing prices they are quickly making buying a new home challenging and in some cases unaffordable for many. While recent price appreciation and an increase in mortgage rates affect all potential homebuyers, those entering the market for the first time are finding the situation especially difficult. Stagnant wage growth coupled with inflation has increased the cost of living, so many are finding it difficult to save for a down payment and afford an expensive monthly housing bill. Being priced out of home ownership prevents people from building the kind of financial security that comes with owning a home.

But don’t worry. You can still buy. For now.

When prices increase rapidly, competition slows as buyers pull out of the market for a variety of different reasons. If you can make the finances work, however, that lower level of competition means you'll have a better chance of nabbing the home you want without any (or as many!) competing offers from other buyers. Another benefit? Lower competition means homes can stay on the market longer and when THAT happens, home sellers are often more willing to negotiate contract terms—and even their asking prices. But....It's hard to know how long these conditions will last. 

Ready to make your homeownership dream a reality? Here's how to do it in TODAY's market:

1. Propose a rate buydown

Is the monthly mortgage payment and cost of interest a major sticking point? If you can secure more upfront funds (either from savings, an inheritance, investments, or other sources) then a rate buydown might be right for you.

A mortgage rate buydown is an option available from a lender to reduce the borrower’s interest rate for a period of time, or indefinitely. The most common way to get a mortgage rate buydown is through points, which are essentially fees that you pay upfront when taking out your loan in exchange for lower interest rates over time. An example: “for a mortgage of $400,000 where the buyer is offered a 6% interest rate, paying $4,000 would lower the interest rate to 5.75%.” Even though you’ll be paying more upfront, the overall amount spent over the life of the loan will be less because you’ve locked in a lower interest rate.

2. Put off major renovations and DIY what you can

If you had plans to roll your remodel costs into your mortgage, you might want to consider seeing where you can save money by either putting those repairs off or doing minor updates on your own. Are major renovations something you really need to do right away in your new home? If you delay them for a few years, you can build equity and eventually pay for those updates with a home equity loan or line of credit. Or better yet: do the renovations on your own without borrowing money at all!

Learning about home maintenance has many benefits! Getting confident about your own ability to make repairs might empower you to consider offering on a lower-priced home that needs a few updates you can do yourself!

3. Revisit your must-have list (for a lower sticker price)

Do you really need all four bedrooms or a home in a specific neighborhood? Could a less-updated or aesthetically pleasing home be something you’d consider? Opting to shop for a smaller house or one that meets your essential needs instead of one that has everything on your wish list could allow you to find a property that works for you at a more affordable price. By being open-minded about what you deem as “must-haves,” you will have more options to choose from, which increases your chances of finding something that’s available at a lower cost. Here in Arizona, this often means looking further out from your work or children's school to find something that fits your budget in an appreciating market.

4. Increase your downpayment for a lower monthly payment

There are a few creative ways to increase your available cash so you can afford a larger downpayment. Here are some top options:

Hold off on buying to save up 

While it's always the right time to buy since real estate works over time every time, it's not always the right time for you. To increase the amount you have available for a downpayment, you may want to consider putting off the purchase of a home until you are able to save up more money. You will need to determine your savings goal and make sure it’s realistic for your financial situation. Some tips for saving money: buy groceries in bulk to reduce the impact of inflation on your budget, find ways to spend less on gas by driving less and doing errands on bike or on foot, and reduce expenditures on non-necessary purchases like eating out or updating your wardrobe. A side hustle is also a great way to build up your savings. Driving for a rideshare company, housesitting, or dog-walking are all easy sources of part-time income. Keep in mind that there are programs available for both down payment assistance and options for sellers to pay your closing costs so be sure to reach out to your real estate agent early to start the discussions about your budget and savings plans.

First-time home buyer assistance (if it applies) 

If you qualify as a first-time homebuyer, there are potential financial assistance programs available from state and federal governments that could help increase your downpayment funds and result in lowered monthly payments. These programs vary by location, so ask your real estate agent to research what’s available in the area you plan on living. There are also programs for first responders, veterans, teachers, doctors, nurses and more - so be sure to ask an agent which one might be the best fit for who when it comes time to buy your first (or last!) home.

Gift money 

Do you know anyone who might contribute a gift to your downpayment fund? If so, gift money is a great way to increase your downpayment. It does require careful consideration and planning since gifts from other people must meet certain criteria before being accepted as part of an official loan application process. You’ll need documentation proving the funds’ source and that it’s actually a gift (as opposed to a loan), as well as proof of your own income - but its worth discussing with those closest to you if it would help you become a buyer in today's market. 

It’s best practice to consult with an experienced lender prior to accepting such offers so that all rules governing these types of transactions are followed. 

5. Buy now and refinance later (if you can)

Buying a home while mortgage rates are high and then refinancing later when mortgage rates drop is a smart move because it locks in the current rate. By doing this, you can avoid paying higher interest if interest rates go even higher, and you still get the benefit of the lower rate after you refinance. Additionally, by locking in the current rate, you have more time to build equity in your home before refinancing.

Opting to buy now also helps you take advantage of the reduced competition. If you wait until mortgage rates drop, you’ll be competing with other buyers which might mean you’ll end up contending with competing offers and potentially higher prices.