Sunday, May 26, 2024

How to buy a home in a high interest rate environment

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(BPT) - Following years of all-time low mortgage interest rates, 2023 saw rates fluctuate between 6% and 8%, complicating the plans of some homebuyers, particularly those looking to purchase their first home. What many renters who are looking to become homeowners may not realize is that mortgage rates are only one aspect of affordability, which should be viewed as a three-legged stool: home price, mortgage interest rate, and down payment. Even in a challenging interest rate or home price environment, private mortgage insurance (MI) can be used to help low down payment borrowers achieve the American dream of homeownership.

In some markets, high interest rates have cooled the trajectory of home price appreciation; with home sales dropping 18.7% from 2022 to 2023 and the national median home price increasing less than 1% in 2023. This is good news for first-time homebuyers who saw home prices in some markets increase 20% or 30% in prior years.

So, if the home price is within range, how much cash do you need for a down payment? You may think it is 20%, but the truth is, you can qualify for a mortgage with as little as 3% down.

According to U.S. Mortgage Insurers, private MI has helped nearly 39 million borrowers access homeownership with low down payments. Further, private MI helped nearly 800,000 homeowners purchase a home or refinance a mortgage in 2023, with nearly 35% having incomes below $75,000 and more than 64% of those loans going to first-time buyers. In addition, the most common form of private MI, paid monthly by the borrower, helps homeowners begin building equity sooner and is also only a temporary cost that can be cancelled after 20% equity is established. Importantly, once private MI is cancelled, the monthly mortgage payment goes down, unlike loans backed by the Federal Housing Administration (FHA), a government program featuring monthly MI premiums that are generally not cancellable.

Each homebuyer’s finances are different, therefore it is important to do the math before buying a home. Home prices and interest rates impact the monthly cost, but luckily the private MI industry is able to help homebuyers overcome one of the biggest hurdles to homeownership: the need for a large cash down payment.

There is a saying, “date the rate, marry the home.” Borrowers should always stay within their budget, but those who purchase a home now with a low down payment may be able to refinance later when rates decrease. These borrowers can achieve the American dream of homeownership sooner, start to build equity and avoid some competition from other borrowers who are waiting on rates to drop.

If you’re interested in learning more about private MI, visit lowdownpaymentfacts.com to learn more about your homeownership options.