Thelife- The average 30-year mortgage rate hit 7% in October, the highest in 20 years.
- This can make homeownership seem defeatingly elusive — and horrendously costly.
The average 30-year mortgage rate hit 7% last week, the highest it's been since 2002. That pushed the average monthly payment to buy a new home up to $2,760 in September from just $1,561 a year ago, Insider's mortgage calculator shows.
The mounting costs may cause some prospective homebuyers to feel a bit defeated. But there's hope for those that want to forge ahead and buy a house anyway, Erica Davis, a mortgage broker at Guild Mortgage, a Myrtle Beach, South Carolina-based firm, told Insider.
An 20-year veteran of the industry, Davis ranks in the top 1% of the roughly 340,000 loan officers in the country, according to the Scotsman Guide, which ranks mortgage brokers on criteria including total dollar value of mortgages originated and total number of loans closed. In 2021, when rates were lower and it was a little easier to afford a home, Davis closed on $69 million in mortgages for 304 homebuyers or refinancing homeowners.
Davis, who gives mortgage advice on Instagram to 57,400 followers under the handle @TheStylishLender, said her average loan amount is about $330,000, which is $30,000 more than what Bankrate calculated was the average balance for a first mortgage in 2021.
She shared four pieces of advice for people who want to buy a home right now.
The things Davis recommends — like showing your income history over two years if you work on commission and don't have a W2-applicable job, and staying at the same job until you close on the mortgage — are important when securing a mortgage at any point.
But, Davis stressed, they're especially crucial in a high-rate environment.
Take out the mortgage if the monthly payments would be less than or equal to your rent payments
When rates are high, people get scared.
"People are so fearful that they won't qualify or that it's too big of a risk," Davis said.
But securing a mortgage is doable if you can find a home where your monthly payments, which include the mortgage as well as homeowners' insurance and taxes, are about what you can pay in rent, Davis said.
That amount should also be affordable based on your income. Buyers' monthly payments should not be more than 30% of their income, and buyers should have six months' worth of payments saved up in an emergency fund, Insider's personal-finance team said.
Plan on refinancing later
The main reason Davis advises residential borrowers to purchase even when rates are high is because they can refinance when interest rates are lower.
If a homebuyer took out a $300,000 mortgage at a 6.8% rate in November 2022, they'd pay about $1,996 per month, totaling $718,560 over 30 years, according to Insider's mortgage payment calculator. If that homebuyer refinanced a year later when the rate had dropped to, say, 4.5%, they'd pay $1,520 per month from that point forward and $547,200 altogether, per the calculator.
Refinancing does come with some additional fees, including closing costs that are between 2% and 5% of the loan principal. That means a $300,000 loan could cost the borrower an extra $15,000 in closing costs.
The rates for refinancing are typically slightly higher than they are for regular mortgages, but odds are they will be lower in a few years than they are right now.
And though no one can be sure when rates will go down and by how much, economists at the financial-services firm Morningstar predict that the Fed will start lowering rates in mid-2023.
Negotiate with the sellers to have them pay some of closing costs
Sellers may now be more willing to negotiate than they were six months ago as the number of days homes are on the market rise and the asking prices dip. In August, about 92% of recent buyers had closed on sales that had buyer-friendly terms, according to Realtor.com.
Not only are rates high, but closing costs are high, too. For a $300,000 mortgage, closing costs will likely be between $6,000 and $15,000.
So Davis advises homebuyers to, during negotiations for the sale, ask the sellers to pay some or all of the closing costs.
Spend less than half of your credit-card limit every month
Your credit score is always important when applying for a mortgage, but it's all the more important in a high-rate environment.
Credit scores range from 300 to 850 and fall under five ranges: poor, fair, good, very good, and excellent. A credit score of 620 — which is in the "fair" range — or higher can generally allow buyers to secure a mortgage, according to Quicken Loans, a mortgage-loan provider. The higher the credit score, the more favorable the terms, according to CNBC.
One way to strengthen your credit score quickly and make sure it doesn't drop suddenly is to never have a balance on your credit card that totals more than half of its credit limit, Davis said.
When you rack up more than 50% of your limit in credit-card charges in a given month, it drags your credit score far down — and quickly, she said.
So if your credit limit is $10,000, only spend a maximum of $5,000 per month so that you're not in for a surprise when you try to close on your mortgage.