Interest Rates and Home Buying

The US housing market is gearing up for “a robust year,” with demand for housing high and many markets experiencing their best year since 2007. This is good for both sellers and buyers in many states — especially in metropolitan areas.

However, if your city or state is one of the areas currently experiencing an influx of growth you might encounter some heavy competition in your home search. Additionally, since the Federal Reserve recently raised interest rates, many people in the process of credit repair might be wondering: should we try to find a cheaper home, or should we wait until interest rates are lowered?

When determining your budget while shopping for a home, your interest rate might not be the first thing on your mind, but it should be taken into account. Before submitting that first offer, it’s important to research current interest rates as determined by the Federal Reserve (the Fed). Your own financial history and profile, however, will be the final determining factor when it comes to your interest rate. The Fed only dictates the lowest possible rate you can get.

Since the price of homes has historically trended upward (100 percent over the last 50 years), it’s likely that the price of your dream home won’t drop too drastically. Market forecasts aren’t always reliable or accurate, so it’s not always a safe bet to wait.

Waiting for Rates to Drop

Unless you have a crystal ball and can guarantee that interest rates will drop again in the future, this option is riskier. At some points in history, the interest rate has been as high as nearly 20 percent, and as low as 0.25 percent, with the latter happening in 2008 to help breathe new life into the housing market, and the former to combat triple-digit inflation numbers.

If you choose to wait out interest rates in hopes that they will drop (which they tend to do when the economy needs a boost), it’s a good opportunity to work on your credit. That way, if rates don’t go down, you’ll still be in a better position to buy a home because your credit will be in good shape. Here are a few things you can do to get the best interest rate possible while you repair your credit — regardless of interest rates.

  • Lower your debt-to-income ratio

    Mortgage lenders will look at how much debt you’re carrying compared to how much money you bring in. If you spend more than 40% of your monthly income on debt repayment, lenders will be hesitant to lend a significant amount of money. At the end of the day, they just want to make sure you have enough to pay your mortgage payment each month.

    So, if you’re running up against this particular roadblock, it might be a good idea to spend some time paying down your debt. Not only does this raise your credit score, but it frees up more of your income to spend on your future mortgage.

  • Improve your credit score

    Paying down debt isn’t the only way to improve your credit score. There are many things you can do. Run a credit report (this will ding your credit score, but not by much, and not for long) to see where you stand. Make sure there are no outstanding accounts or loans in default. This is also a good opportunity to make sure your credit isn’t being compromised by identity theft.

    If your credit has no negative items, but your score is still low due to lack of credit history, there are a few things you can do to raise your score. Try asking a parent with good credit history if you can be added to one of their long-standing credit cards. This could potentially add years of positive credit history. If you have any small student loans, pay them off if possible.

  • Increase your down payment

    If your credit is in good shape, and your debt-to-income ratio is under control, consider saving money to add to your downpayment. The bigger your downpayment, the smaller your loan. Additionally, if you have more than 20 percent to put down on your home, it may help lower your interest rate. If this is difficult with your current income, consider getting a part time job. In today’s current gig economy, there are many available opportunities to make a little extra cash on your own time. Since it would be money you haven’t needed in the past, you could put it away immediately and never miss it.

  • Get your paperwork in order

    When you finally put in an offer on a home and it gets accepted, you’ll need to be ready to provide your lender with a lot of documentation. W-2s, tax returns from previous years, paystubs, and more will likely be requested within the first week of an accepted offer. If you have these things ready to go before you even submit an offer, it will help the process run more smoothly.

Repairing or improving your credit takes time but can be very financially beneficial, especially when it comes to your mortgage and interest rate. Rather than trying to simply decide between the two scenarios outlined above, choose to take a more holistic view of your financial health and improve the areas that need it.

Many sites offer helpful mortgage calculators and other tools to help you estimate your monthly mortgage payment. Many factors will determine this: downpayment, overall loan amount, monthly income, credit score, and more. Simply try plugging in numbers for these two hypothetical scenarios. You can also speak to your lender or mortgage broker to figure out a more concrete answer to your question. There’s no easy answer, and only you and your family can truly decide what’s best for you financially. To learn more about credit repair, a credit repair service could be beneficial. To learn more contact CreditRepair.com.

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