Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

When the housing market was searing hot, buyers faced intense competition — bidding wars, cash investors, and buy/sell decisions made on rapid deadlines. Now that real estate has cooled, there are fewer homes for sale, two-decade-high interest rates, and stubbornly elevated house values.It’s rarely easy to buy a home. And if you can find a house you love, the question becomes: Is now a good time to buy?The 2023 housing marketLooking for the perfect time to buy? Fewer than one in five consumers surveyed by Fannie Mae in July 2023 thought that it was a good time to buy a home. Yet, timing the housing market is more complicated than timing the stock market. Which is impossible. There are few “just right” Goldilocks real estate markets.But you’re not buying the market. You’re buying a house in a city, neighborhood, and block where you want to live. Hopefully, for quite a while.Mortgage ratesWe all know this story. Interest rates have risen — and mortgage rates are no exception. The Federal Reserve has been raising short-term interest rates for well over a year in an effort to shrink inflation — the rise in consumer prices. Not only do the Fed’s rate increases immediately lift short-term mortgage rates such as variable-rate loans, but they also tend to influence long-term mortgage rates upwards as well eventually.And though we don’t live in a 2%-3% world these days, mortgage rates are near their 52-year historical average.Since April 1971, the 30-year mortgage rate has averaged 7.74%, based on data collected by Freddie Mac.Of course, that’s little comfort to homebuyers today who remember when rates were under 3% for much of 2021. Conversely, the highest rate on record was a whopping 18.63% in October 1981.According to Zillow research, the trend of mortgage rates — whether interest rates are generally rising or falling — may influence whether existing homeowners would consider selling their existing house to move into another. With so many existing homeowners paying a much lower mortgage rate, the study found it would take rates to fall somewhere to between 4% and 5% before they would sell the home they’re in and buy another.This rate gridlock is contributing to the lack of existing homes for sale.Take action: Consider the interest rate strategies below until (and if) mortgage rates fall significantly lower for an opportunity to refinance.Home valuesThere is a little good news, though. Higher mortgage rates have softened the real estate market, and the increase in home prices is moderating.The rise in existing home values is slowing. Home values are lower year-over-year in almost half (23) of the 50 largest metro areas, according to a Zillow analysis.Take action: Look for homes with price reductions where you want to live. Then negotiate even harder.But listings for existing homes are far fewer. For more than 12 months, new listings have been down year-over-year. The number of new listings of homes for sale is down more than 20% from pre-pandemic levels, according to action: Consider expanding your search to more affordable areas close to your favorite neighborhood if it’s too pricey.New home inventory is rising. Construction of new homes is showing promise of growth, according to the U.S. Census Bureau. However, builders are still wary of oversupplying the market, concerned that consumer demand could sag as potential buyers shy away from rising mortgage rates.Take action: If you want to buy a house now, consider new construction. You may be able to choose some finishes or make an even better deal on a spec home that’s been on the market for a while.When is a good time to buy a house?Buying a home is more than considering macroeconomic factors. It’s an important life decision based on your personal and financial situation.Where do you want to be in 5 years?When you rent, the decision to move is broken down into six months, or a year or two at a time, as your lease renews. But every dollar-related detail makes a home purchase a medium- to long-term investment. Buying a house includes various costs: the down payment, closing costs, and financing fees, moving expenses, property taxes, and perhaps selling your existing place.Homeownership requires a years-long timeline. How you make a living, your friends, family, and even community amenities all come into play.Your incomeA primary consideration: your job. Will it require a location change anytime soon, or can you live where you please? Is your income steady and all but assured?Your credit scoreOne of the significant factors that will qualify you for a home loan is your credit score. It’s important to know it before applying for a mortgage.For the most common loan, a conventional mortgage not backed by a government agency, you generally need a FICO score of 620 or better.FHA loans can allow a credit score as low as 580 with 3.5% down. VA loans issued to qualified military service members and veterans don’t officially have a minimum credit score, though some lenders will require a FICO score of 620.As a benchmark to where you stand, the median credit score on a new mortgage in the second quarter of 2023 was 769, according to the New York Federal Reserve.Of course, minimum scores are the entry-level to qualifying; the higher your score, the better the loan terms you’ll be offered. Most importantly, that can mean you’ll pay a lower annual percentage rate over the life of the loan. You may also have more room to negotiate on fees.Your current debt loadA primary financial metric lenders will use to determine your creditworthiness is your debt-to-income ratio.Fannie Mae, a government-sponsored entity that provides liquidity to the home loan market, looks for a maximum total DTI ratio of 36% of “the borrower’s stable monthly income.” Exceptions can allow for total DTIs up to 50%, but it’s usually best to avoid working on the edges of qualification if you can.You can calculate your DTI by dividing your total recurring monthly debt by your gross (before taxes and other deductions) monthly income.Include debt such as monthly mortgage payments (or rent), real estate taxes, and homeowner’s insurance. Also, add any car payments, student loans, and the monthly minimum due on credit cards. Remember any personal loan payments and child support or alimony.Do not include debt such as monthly utilities — like electricity, water, garbage, or gas bills — or car insurance, television streaming subscriptions, or cell phone bills. You can also exclude health insurance costs and miscellaneous expenses such as groceries or entertainment.Your savingsHaving a cash cushion in the form of emergency savings shows lenders that you are prepared for the unexpected. Of course, that savings account should also include …Your down paymentA large chunk of your savings account should be dedicated to the down payment. A minimum of 3% down is required in order to qualify for a conventional loan targeted to first-time homebuyers — or ideally, 20% to avoid private mortgage insurance. Yes, zero-down options exist if you are eligible for a VA- or USDA-backed loan.According to, the average down payment in the first quarter of 2023 was 13%.4 rate-relief strategies to considerBuying a house when interest rates are high can require some financial finesse to enhance affordability.1. Buying discount pointsPrepaying interest in order to lower your ongoing mortgage rate is called buying discount points. One point is equal to 1% of the loan amount. However, lenders sometimes add a point or two to a mortgage proposal to make their loan offer appear more enticing. But you’re actually paying for the discount with an upfront fee.When shopping for a loan, compare loan offers with zero points. Then, you can decide whether to buy points to lower your interest rate. It is important to note that buying one point (paying 1% of the loan amount upfront) will generally reduce your interest rate by only one-quarter of a percentage point.2. An interest rate buydownBorrowers can lower their mortgage interest rate for the first few years at the beginning of the loan term with a buydown. Home builders, sellers, and some lenders sometimes offer an interest rate buydown to boost sales.While you get a short-term break on the interest rate, your payments and total interest may actually be higher. It’s a strategy that requires running the numbers on the long-term benefits.If you’re paying for the buydown, compare a mortgage both with and without a buydown. By the way, lenders will qualify you based on the permanent interest rate, not the temporary buydown rate.3. An adjustable-rate mortgageA mortgage product that increases in popularity whenever rates begin to rise is back: the adjustable-rate mortgage.ARMs have a fixed interest rate for an introductory period, often five to 10 years, and then the rate changes regularly, usually once or twice a year. Tips when shopping for an ARM:Look for an introductory rate that is lower than a fixed-rate mortgage.Choose a term you feel comfortable with, perhaps in line with how long you plan to stay in the home.Make sure you budget for possible increases in your monthly payment if the interest rate moves higher after the end of the introductory rate period.4. A shorter-term mortgageAre you more comfortable with an interest rate that never changes, even if your monthly payment is slightly higher than you’d like? Consider a shorter-term loan. Mortgages with 20- or 15-year fixed terms, as opposed to the traditional 30-year term, typically come with lower interest rates. The lower rate and shorter term combination means you’ll gain equity in your home faster, too.Your next moveBuy smart and shop a lot. Relentlessly shop mortgage rates and lenders for the best loan offers and justified fees. Get a written preapproval from your lender, then shop for a house you can love and can afford. Your home buying competition is.According to Zillow, when it comes to first-time buyers versus repeat buyers, first-timers are more likely to reach out to at least three lenders and three real estate agents.

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