House Hunter's Handbook: A Tailored Home Buying Checklist for Higher Interest Rates

High interest rates can make the home-buying process even more difficult to navigate. When mortgage rates climb, fewer people list their homes for sale, which can make it harder to find a property that works for your family. High-interest rates also increase monthly mortgage payments and reduce your purchasing power as a buyer. To help you navigate these obstacles, we’ve created a home-buying checklist that’s tailored to current market conditions. Check out our tips below.

Home Buying Checklist for Higher Interest Rates

Assess Your Financial Situation

The first step for any homebuyer is to assess your financial situation and determine if it’s the right time for you to buy a home. Ideally, you should have enough money saved up to make a sizable down payment, cover your closing costs, and maintain an emergency cushion for future home repairs and maintenance.

Keep in mind that closing costs are usually between 2% and 6% of the total loan amount. Down payments can be as low as 3%, but you’ll likely need to pay PMI if you put less than 20% down on a conventional loan.

However, if you don’t have enough money saved up for these costs, you can look into down payment grants and assistance programs. You may also be able to use gift funds from relatives to help pay for home-buying costs.

Determine Your Budget and Get Prequalified or Preapproved

Before you go home shopping, you’ll need to get prequalified or preapproved for a mortgage through a lender. Getting prequalified can help reassure sellers that you’ll be able to secure financing and complete the deal. During the prequalification or preapproval process, your loan officer will tell you the maximum amount you’re qualified to borrow based on your financial situation, but you shouldn’t necessarily use that figure as your home-buying budget.

It’s important to consider your income, expenses, and lifestyle when determining your budget. For example, if you want to renovate or buy new furniture, you should purchase a home that’s beneath your means so you have some money left over after closing.

If you still want to travel, eat out, or meet financial goals like paying off your mortgage early, you shouldn’t stretch your finances by purchasing a home at the top of your budget. A good general rule is to limit your monthly mortgage payment to no more than 28% of your gross monthly income.

Check Your Credit

When assessing your finances, you should also request a free credit report from AnnualCreditReport.com and make sure there aren’t any errors. Sometimes credit accounts that aren’t yours can accidentally be attributed to you, which can hurt your credit score. If you find a mistake, make sure you dispute it with the credit bureau.

Lenders will review your credit report and score to assess your creditworthiness and calculate the interest rate of your mortgage. Having a solid credit score is an advantage in a high-interest environment because it will help you secure a better mortgage rate.

Buyers with bad credit usually have to pay higher interest rates and may even have trouble getting approved for a conventional mortgage. If you have subpar credit, government-backed mortgages could be a good option because they tend to be easier to qualify for and may offer lower interest rates than conventional loans.

For example, FHA loans have a minimum credit score requirement of just 500 and offer down payment options as low as 3.5%. Keep in mind that if you make a low down payment, you may need to pay an annual mortgage insurance premium, which will increase your total housing costs.

Be Flexible About Your Home Buying Wishlist

The next step on our home-buying checklist is to find a realtor you trust and start touring houses. During the home search, it’s important to be flexible about your must-haves. If there are too many items on your wishlist, it could be hard to find a home in your budget, especially in this high-interest rate environment.

Because mortgage rates are elevated, fewer homeowners are putting their houses on the market, so supply is low. Although high-interest rates also deter buyers, you’ll still have some competition because the housing supply is more limited.

Higher interest rates also reduce your purchasing power as a buyer. The monthly mortgage payment for a $400,000 house is much higher at a 7% interest rate than 4%. You may need to shop for homes in a lower price range than you anticipated to make your housing payment affordable.

This may mean choosing a fixer-upper that requires some elbow grease instead of a move-in ready dream home. Because high-interest rates require you to compromise a bit, you may be tempted to wait until they come down so you can afford a more expensive home. However, this strategy can backfire.

When interest rates decrease, more buyers enter the market. This can cause home prices to rise and possibly negate any savings from lower interest rates. So you might have to make peace with the idea that you won’t get everything on your wishlist, especially if you have a limited budget.

Consider Building a Home

If you can’t find any existing homes that appeal to you, consider building a home. Building a home is typically more expensive than buying an existing house. However, buying a new build can help you get exactly what you want instead of settling for an unsuitable home because of a limited housing supply.

As a bonus, new homes usually have lower repair and maintenance costs. Builders may offer incentives like a mortgage buydown, which lowers your interest rate for a year or two. The builder pays for this expense at closing so you can have a lower mortgage payment as you get settled into your new home. You can also try to negotiate with the seller of an existing home and ask them to pay for a mortgage buydown.

Shop Around for the Best Mortgage Rate

Because interest rates are high, it’s even more important to shop around and find the best mortgage rate. Studies have shown that buyers who receive four mortgage rate quotes from different lenders can save $1,200 per year or more on their mortgage payments. Just make sure that you gather all of your quotes within 30 days.

Lenders have to pull your credit report to give you a rate quote, which results in a hard inquiry and dings your credit score a bit. But if you get your rate shopping done in 30 days, all of the quotes will only count as one hard inquiry, reducing the impact on your credit score.

Make a Bigger Down Payment or Get a Shorter Loan

Interest costs are a concern for buyers in this high mortgage rate environment, and good reason. Studies have shown that buyers will pay an average of $43,593 more over the life of their mortgage due to high-interest rates.

Luckily there are strategies you can use to lower your interest costs, such as making a bigger down payment. Putting more money down at closing enables you to take out a smaller loan, which will reduce your monthly mortgage payment and total interest costs.

Many lenders also allow you to purchase discount points at closing to lower your interest rate. Each discount point usually costs 1% of your loan amount and reduces your interest rate by 0.25%. However, the way discount points work can vary depending on which lender you choose.

If you don’t have enough money saved to make a bigger down payment, look into getting a mortgage with a shorter term. Mortgage rates for 15-year loans tend to be lower than 30-year loans, which can save you thousands in interest. However, your monthly mortgage payment will be higher if you choose a shorter loan term, which is something to consider.

Plan to Refinance or Recast in the Future

The final step in your home buying checklist is to plan for a refinance in the future. Experts say that interest rates could fall in 2024 or 2025, which may give you a chance to refinance and secure a lower interest rate. Keep in mind that there are usually closing costs associated with refinancing, so it’s a good idea to start saving up some money to cover them.

Even if interest rates don’t come down, you may be able to recast your mortgage. Recasting involves making a lump sum payment on your mortgage that’s usually at least $10,000. After you pay the lump sum, your lender will recalculate your monthly mortgage payments based on your current loan term and the new lower mortgage balance.

This recalculation reduces your monthly payment without changing your interest rate or loan term. Recasting is usually cheaper than refinancing as well and costs a couple of hundred dollars. However, you’ll have to save up enough cash to make a lump sum principal payment. Plus, certain types of mortgages like FHA loans can’t be recast. So make sure you choose a loan type and lender that permits recasting.

Would you add anything to this home-buying checklist? Share your thoughts and tips in the comments below!

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Vicky Monroe

Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.