6 Things Homebuyers Need to Know About Rising Interest Rates

Mortgage rates recently surpassed 4% -- for the first time in almost three years. If you're thinking of buying a home in the near future, these higher rates will inevitably impact your goals (not to mention your pocketbook).

Here are six ways you can expect rising rates to influence your homebuying journey.

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Interest rates directly impact your homebuying budget. Here's an example: Say you can afford a $1,000 monthly payment. At a 3.5% rate, that'd give you about a $222,000 budget to work with. At 4.5%, though? Your budget would drop to just $197,000, severely limiting the properties you could afford (particularly in today's hot market).

If you wanted to keep shopping in the same price range, you'd have to deal with a higher monthly payment. In that previous scenario, for example, keeping that $222,000 budget at a 4.5% rate would equal a payment of about $1,125 per month — a good amount more than that $1,000 you were originally planning for.

If you can't afford the higher payments that come with increasing rates, it might mean you'll need to pivot -- maybe to a more affordable property type, like a townhouse, co-op, or condo. You could also consider branching out into more rural markets where competition (and prices) maybe aren't so steep. Both moves can help you deal with the impact rising rates bring.

ALSO READ: Condo vs. Townhouse: What You Need to Know Before You Buy

Interest rates are heavily influenced by your credit score and the size of your down payment. Higher credit scores and larger down payments equal lower rates, and low scores and small down payments? Well, they mean the opposite.

If you want to get the absolute lowest rates possible, take time to improve your credit score and increase your down payment. Try to shoot for a 760 or higher and at least 20% down.

There are a few types of mortgage loans that come with lower rates than others. ARMs -- or adjustable-rate mortgages -- are one such example. On these, you'll get a low rate up front (usually for three, five, seven, or 10 years), and the rate can rise annually after that. While the rate hike can be dangerous (there's no way to know just what your payment might be), it can help you minimize costs in the early years of your loan.

If you know you'll be able to refinance or you plan to sell the home before your rate can adjust, they're often an economical option -- particularly in a rising-rate environment.

Shorter-term fixed-rate loans can also be an option. For example, the week of March 17, the rate on 30-year loans was 4.16%. But 15-year loans? They saw just a 3.39% average rate. In the long run, the 15-year loan would save you around $142,000 in interest (though it would also come with a higher payment).

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If you really want to avoid those higher rates, you could buy discount points. These essentially let you pay cash up front for a lower rate on your loan. The exact price of points varies, but it's usually around 1% of your loan amount. This lowers your rate anywhere from 0.125 to 0.25. You'll have to ask your mortgage lender how much discount points cost for your loan, as well as how many you can buy (there's often a limit).

ALSO READ: What Are Mortgage Points and How Do They Work?

One way to combat higher rates is to increase your earnings, which, for many, is easier said than done. If you have a full-time job, it might mean asking your boss for a raise. Or, if you’re hourly, just taking on an extra shift could help you afford those higher payments.

Another option is to take on a side gig, like driving for Uber or Lyft or running errands for apps like Favor. You could also start freelancing or consulting on the side or try a more creative endeavor, like opening an Etsy shop.

ALSO READ: How to Negotiate a Raise in 7 Steps

While higher interest rates certainly aren't going to make buying a home more affordable, they shouldn't dash your dreams entirely. Talk to a mortgage lender or broker about your options, and get creative in finding something that works for your budget. And when in doubt, wait it out.

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