Buying a home amid higher mortgage rates? Follow these tips.

Among the casualties of the Federal Reserve’s determined efforts to combat inflation through higher interest rates have been prospective homebuyers, as the average 30-year fixed-rate mortgage has soared from 3.1% at the end of 2021 to 7.6% percent by October 12, 2023.³ As of March 28, 2024, the rate stood at 7.0%.

This jump in mortgage rates has resulted in a significant rise in monthly payments. It’s little wonder then that so many Americans feel that buying a home is now out of reach. Yet, there are a number of strategies that can help you attain your dream of a new home.

1. Save for a bigger down payment

A larger down payment reduces the monthly mortgage payment by having to borrow less and by potentially obtaining a more favorable interest rate on your mortgage. Moreover, if you are able to put down at least 20 percent of the purchase price, you’ll also save on the cost of PMI (private mortgage insurance), which is typically required when a home is purchased with less than a 20 percent down payment.

2. Consider an adjustable rate mortgage

An adjustable rate mortgage usually offers a lower rate than a 15- or 30-year fixed-rate mortgage, translating into lower monthly payments. Interest rates may be set for the first three, five, seven or ten years, after which the interest rate charged will reflect the then-prevailing rates. The major risk with an adjustable rate mortgage is the prospect that mortgage rates will be even higher when the initial interest rate gets reset. An adjustable rate mortgage may be more appropriate for individuals who expect to sell their home during the period of the loan (e.g., due to a job relocation) or who believe rates will be lower in the future.

3. Adjust your expectations

Current realities may require that you modify your expectations about the home you wish to buy, your preferred location, and even the timing of a home purchase. For instance, you may want to expand your search to different locations where housing may be relatively less expensive or have lower property taxes. You may also want to delay a purchase so you can accumulate a larger down payment or until housing prices weaken.

4. Shop around for a mortgage

Rather than work with a single lender, consider obtaining mortgage quotes from multiple lenders or work with a mortgage broker who may be able to offer a wider choice of mortgage products and rates that better meet your needs and circumstances.

5. Work on your credit score

Having a good credit score is essential to being approved for a mortgage at a competitive rate. Check out your credit score and look for errors and problems that may be dragging down your credit score.