4 Ways to Make Homeownership Affordable Even as Rates Rise

Homeownership isn't necessarily out of reach due to rising rates.

Getting a mortgage is a lot more expensive today than it was a short time ago. While mortgage rates plummeted during the pandemic and it was possible to get a 30-year fixed-rate loan with a rate below 3%, rates are now hovering closer to 6%. That means the cost of a home loan has come close to doubling already.

Unsurprisingly, paying a lot more interest can make buying a home much more difficult. But there are still options to make homeownership affordable, even at a time when mortgage rates are rising. Here are four techniques to consider if you're thinking about buying a property and are worried about affording a high-cost home loan.

1. Make a larger down payment

If you can afford to do so, consider putting more money down on a home when you purchase one. This can help make your loan more affordable for several reasons:

• You will be borrowing less, so you'll pay interest on a lower balance.
• You may be able to avoid private mortgage insurance, which is an added monthly cost you pay to protect a lender from losses when you make a down payment below 20% of the home's value.
• You may be able to qualify for a better interest rate since lenders view loans as less risky when you have a larger down payment.
• You may have a broader choice of lenders to get a mortgage from since not all lenders offer loans with low down payments.

It can take sacrifice to save up more money to put down, but this is often the single best way to reduce borrowing costs during a time of high interest rates.

2. Improve your credit score

Lenders consider your financial credentials when setting rates. If you improve your credit score, you will qualify for more competitive interest rates. You'll also have a broader choice of lenders, since some mortgage loan providers have stricter criteria for who can borrow, and a credit score plays a key role in their assessment of eligibility.

At a time when rates are higher across the board, it is especially important not to cause your interest charges to be elevated even further due to low credit. So work on paying off debt and taking other steps to improve your credit, such as asking lenders to remove negative information from your record if you have mostly been a good customer who made a few mistakes.

3. Shop around for lenders

There can be quite a bit of variation in terms of interest rates from one lender to another. When rates are high as they are now, it is even more important to make sure you shop for the most competitive interest rate possible. You should get quotes from as many mortgage lenders as is practical to make sure you are being offered the lowest possible financing costs.

4. Choose a different kind of loan

Finally, you'll need to be smart about choosing your loan. If your priority is the lowest payment possible, you may want to opt for a 30-year loan instead of a 15-year loan because payments are much lower when you take twice as long to repay your full balance. On the other hand, if you're focused on paying the least amount of interest over time, a 15-year loan instead of a 30-year mortgage could be a good bet.

One type of loan you may want to steer clear of, though, is an adjustable-rate mortgage (ARM). While these may seem attractive since they have lower starting rates, the rate begins adjusting after a fixed period so the loan could ultimately cost you more in the end.

By picking the right mortgage, making the largest down payment you can, and aiming for the cheapest possible rate by shopping around and improving your credit score, you can hopefully end up with a home you can afford even during a time of high rates.