The Housing Market Is Cooling, but Here's Why You Might Still Be Completely Priced Out

Aspiring home buyer? My condolences.

The last two years have been a very interesting time to watch the housing market. I am hoping to become a homeowner myself in the next few years, but I'm happy I decided to sit out this year and next, both because of a lack of money and because of the wild market. We've seen housing prices spike to a median price of $413,800 in June 2022, and mortgage rates sink to below 3% near the end of 2021. Those numbers are now moving in the opposite directions; the median home price as of Sept. 2022 was $403,556 according to Redfin, and the average interest rate on a 30-year fixed-rate mortgage is now 6.95%, per Freddie Mac.

If you're an aspiring home buyer, you might be feeling as if you just can't win. Read on to see how higher mortgage interest rates can have a detrimental impact on your efforts to buy a home, and to learn some ways you can try to bite back if you've got your heart set on becoming a homeowner sooner rather than later.

Higher interest rates make buying even harder

Buying a home is expensive enough even without figuring in a higher mortgage rate, so by getting a mortgage at close to 7%, it's just adding insult to injury. How so? Let's take a look at two home-buying scenarios with two different interest rates.

Let's say that it's the middle of Nov. 2021, and you've managed to get your offer accepted on a home that will cost you $350,000. You manage to qualify for the current average rate on a 30-year fixed-rate mortgage, at 3.10%. What might your mortgage payments look like if you put 20% ($70,000) down on this home? Without figuring in property taxes, homeowners insurance, and any homeowners association fees you'll be paying, you're looking at a monthly payment of $1,195. You'll pay $150,213 in interest over the life of the loan.

Okay, now it's Nov. 2022. You've gotten your offer accepted on the same $350,000 home, and can put down the same 20% (always a good idea if you can swing it, as you'll avoid having to pay for private mortgage insurance). But as of this writing, the average 30-year fixed-rate mortgage is at 6.95%. Again, without extra costs, your monthly payment is now $1,853. Your total interest paid over the life of the loan? $387,108. Ouch. Thanks to the change in interest rates, your monthly payment is $658 more. This is a significant amount of money to me, and it might well be to you too.

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What can you do?

This is a discouraging time to be trying to get onto the property ladder. But if you've been dreaming of becoming a homeowner, I completely sympathize. Here are a few tips to ensure you can make the best out of a bad situation.

Improve your credit

I know, I know, I say this a lot. But it's honestly astonishing how much easier big money moves (like getting a loan, qualifying for a top-notch rewards credit card, or buying a home) can be if you have a higher credit score. Check your score, and if it's not where you want it to be, order a copy of your credit report and see what's up. Maybe you have an error that you can have removed, automatically boosting your score. Or maybe you can see in black and white that you haven't been good at making on-time credit card payments, and if you make an effort to do better, your score will improve (remember, payment history makes up 35% of your FICO® Score).

Offer a generous down payment

If you can swing that 20%, you'll save money by not having to pay PMI. And you might also score a competitive mortgage rate as a result (especially if you've also got good credit), because lenders will see you as less of a risk. If you can't, any amount you can put down over the usual bare minimum for an FHA loan (3.5%) or a conventional loan (3%) can help you improve your standing with a mortgage lender.

Consider an ARM

This last tip is more of a risk; adjustable-rate mortgages have kind of a bad reputation. But they might be right for you, as you'll score a lower rate for a fixed period of time (often five or seven years), and if rates come down in the interim, you can refinance into a fixed-rate loan. Or if you're not intending to live in your home for any longer than the initial rate will last, you may not need to worry about that rate going up.

It's hard to say whether the market will improve for buyers in 2023. We might all just have to grit our teeth and hope for the best. But focusing on improving your credit, saving for that down payment, and considering an adjustable-rate mortgage (if it will work for you) can all be good moves to make.