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Taking out a mortgage is now much more expensive than it was recently. While mortgage rates plummeted during the pandemic and it was possible to obtain a 30-year fixed-rate loan with an interest rate of less than 3%, interest rates are now approaching 6%. This means that the cost of a home loan has almost doubled.
Unsurprisingly, paying a lot more interest can make buying a home that much more difficult.
But there are still opportunities to make home ownership affordable, even at a time when mortgage rates are on the rise.
Here are four techniques to consider if you are considering buying a home and are worried about paying off an expensive home loan.
1. Make A Larger Deposit
If you can afford to do this, consider spending more money on a home when buying one. This can help make your loan more affordable for several reasons:
- Borrow less, then pay interest on a lower balance.
- You may be able to avoid private mortgage insurance, which is an additional monthly cost you pay to protect a lender from losses when you make a down payment of less than 20% of the home’s value.
- You may qualify for a better interest rate because lenders consider loans to be less risky if you pay a larger down payment.
- You may have more choices of lenders to get a mortgage from, as not all lenders offer low down payment loans.
This may force victims to save more money to invest, but it’s often the best way to reduce borrowing costs in times of high-interest rates.
2. Improve your credit score
Lenders consider your financial credentials when setting interest rates. Improving your credit score will qualify you for more competitive interest rates.
You also have a wider choice of lenders, as some mortgage providers have stricter criteria for who can borrow, and a credit score plays a key role in their eligibility assessment.
At a time when rates are higher across the board, it’s especially important not to let low credit add to interest charges.
So work to pay off your debt and take other steps to improve your credit, such as asking lenders to remove negative information from your record if you’ve usually been a good customer who made some mistakes.
3. Shop around for lenders
There may be some variations in terms of interest rates from one lender to another.
When rates are as high as they are now, it’s even more important to make sure you’re buying the most competitive interest rate possible.
You should get quotes from as many mortgage lenders as possible to make sure you are offered the lowest possible financing cost.
4. Choose a different type of loan
Finally, you need to be smart when choosing your loan. If your priority is to get the lowest possible payment, you might want to opt for a 30-year loan rather than a 15-year loan, as the payments are much lower if you need twice as much.
Time to pay off your entire balance. On the other hand, if your goal is to pay the lowest interest over time, a 15-year mortgage instead of a 30-year mortgage might be a good choice.
One type of loan you may want to avoid is an adjustable-rate mortgage (ARM).
Although these may look attractive as they have lower initial interest rates, after a set period the interest rate will start to adjust, so the loan could end up costing you more.
By choosing the right mortgage, making the highest possible down payment and aiming for the lowest interest rate, doing your research, and improving your credit score, we hope you can afford a home.
You can afford it, even in times of high-interest rates.
Reference Source: The Ascent
