It’s bad enough that mortgage interest rates and home prices are high at this time, but even worse, industry experts don’t predict a drop in either for some time to come.
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Wannabe homebuyers may be asking themselves how they can afford a home under these conditions. With no major relief in sight — barring congressional interventions — what can a potential homebuyer do to afford a new home?
Experts explain 14 tips that can make your dream of homeownership a reality even in these tough times.
Understand Your Financing Options
“With interest rates expected to remain elevated for the foreseeable future, the best thing you can do right now is understand your financing options,” said Chris Birk, the vice president of mortgage insight at Veterans United Home Loans.
In addition to having a clear understanding of what you can afford based on your own financial situation, he said it’s also important to look for opportunities that make purchasing more affordable.
Comparison Shop
With rates topping 7%, even a small difference in interest rates can add up over multiple years, Birk said, so shop around.
“Shop with multiple lenders, and compare rates,” recommended Birk. “A buyer can save hundreds of dollars a year based on a 0.25% difference in interest rates.”
Birk continued with this example: At 6.75% on a $300,000 mortgage, a buyer can expect to pay $1,946 a month in principal and interest. The same buyer would have a monthly mortgage payment of $1,996 and $2,047 with a mortgage rate of 7% and 7.25%, respectively.
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Understand Your Mortgage Options
Birk also suggested getting a comprehensive understanding of the types of mortgages available to you before you make any move.
“Government-backed loan programs come with low or no down payments, and can be a good option,” he said.
“For instance, VA loan rates are typically about 0.25% lower than those of conventional loans, and credit guidelines are more flexible. In addition, the VA benefit never expires, so you can use it every time you purchase a home.”
If you already own a home and are trying to buy another, or sell and buy, Birk said you may be able to refinance your current mortgage or tap into the equity in your current home to buy a new one.
Consider an Assumable Mortgage
A lesser known option is an assumable mortgage, which allows a buyer to purchase a home by taking over the seller’s current mortgage loan, Birk explained.
“VA, USDA and FHA loans are all assumable. Although the downside is often a larger down payment, buyers who assume a mortgage typically have lower closing costs, no appraisal and less debt because the amount of their mortgage is lower,” he added.
Buy Down Your Rate
A rate buy-down allows buyers to reduce their mortgage rate over the life of the loan, which decreases their monthly mortgage payment.
Birk explained, “Buyers can either temporarily or permanently lower their interest rate by purchasing discount points upfront or rolling them into the loan. The buy-down is typically funded by the buyer, seller or builder.
“In fact, some sellers or builders use it as an incentive to make the property more affordable and attractive for buyers.”
Explore Alternative Neighborhoods
According to Alex Coffman, a real estate agent and co-owner of Teifke Real Estate, another option is to expand the areas where you’re looking.
“Consider investigating neighborhoods surrounding your primary area of interest,” Coffman said.
“In many cases, these regions have much lower prices but still offer similar benefits. Specifically, new neighborhoods can present a great opportunity in terms of value as well as appreciation.”
Compromise Your Home Choice
If you’re overly fixated on what your dream house should look like, Coffman warned you might be limiting your options.
“Focus on needs rather than wants,” Coffman recommended. “Be open to properties with some small issues. Occasionally, making minor changes can transform an almost-suitable house into one that is perfect for you.”
Meet With a Financing Mortgage Broker
Don’t try to figure this out alone, Coffman urged. It’s a smart idea to reach out to your mortgage broker and go through all the options available to you.
“Apart from the traditional thirty-year fixed-rate mortgages, there may be adjustable rates or other loan products that are a better fit for your financial circumstances,” he said.
Explore Vendor Financing and Lease-to-Own Programs
Additionally, Coffman explained there may be vendor financing and lease-to-own agreements that offer alternatives when traditional mortgage financing is not possible or desired at this point in time.
He added, “This way, someone may become a homeowner without necessarily getting a conventional mortgage instantly.”
Take on Shared Ownership
If you’re open to purchasing property together with someone you trust, such as a friend, partner or family member, homeownership can be much more affordable.
Coffman said, “Joint ownership makes qualifying for a mortgage quite easy while enabling one to afford his/her preferred household goods or services.”
However, in this case, he warned to take precautions and put together clear agreements and legal documentation that includes state provisions plus obligations.
Seek Government Programs and Local Housing Initiatives
Especially if you’re a first-time home buyer, Coffman recommended looking into government programs and local housing initiatives aimed at helping first-time buyers or people within specific income brackets achieve their homeownership dreams.
“These programs might provide down payment assistance programs, subsidized rates or tax breaks to make homebuying affordable,” he said.
Increase Your Down Payment
On the financial end of things, Coffman shared how saving up to make a larger down payment can often help reduce your monthly mortgage payments and also qualify you for better rates.
Improve Your Credit Score
Improving your credit score can also significantly affect the interest rate lenders offer, leading to more favorable loan terms, according to Coffman.
Consult With Professionals
Lastly, Coffman urged homebuyers to talk to real estate agents, mortgage brokers and financial advisors with insight on what’s happening around the area so they can advise you accordingly. They have the insider expertise and knowledge to help you get to your goal.
While you may have to make some alterations, sacrifices and budget shifts to be able to afford a home right now, it may be more possible than you think.
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This article originally appeared on GOBankingRates.com: Mortgage Rates and House Prices Aren’t Dropping — 14 Tips To Afford a Home Anyway
Source: finance.yahoo.com