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How to adjust your housing budget for higher interest rates

When your dollar doesn’t go as far, how does that affect the search for a new home? Here’s how.

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Planning to buy a home takes time because you have to look at your finances, line up a loan and find something you actually want to own.

If you started this process just a few months ago, you likely did it when interest rates and inflation were both much lower than they are now. Because of ongoing inflation and recent interest rate hikes, your dollar won’t go as far as it used to — which is a big deal when there are as many dollars on the line as there are when you buy a house. (And could get worse if prices go up.)

So, should you abandon your search for a new home? Or should someone buying a house adjust their budget or attitude in light of economic changes?

We put that question to Natalie Taylor, CFP professional and head of financial advice at Monarch Money. Here is her answer.

In this article:

Aim for a cheaper house and a bigger deposit

There’s a saying in real estate that “you live with the payment, not the price,” meaning that regardless of the total cost of your home, what really affects you month-to-month is your mortgage payment. Obviously, as mortgage rates rise, the monthly payment you might have budgeted for in the past will now buy you a smaller house than it did a year ago.

If you had budgeted to pay off a certain amount each month and you can’t easily increase that number, “you can either adjust the total purchase price down so you’re borrowing less, or you can put more down,” says Taylor.

“We always think you put down 20% or the least possible amount,” she adds, “and there are some good reasons to put down less. But at the same time, it’s important to get into a mortgage from a cash flow perspective so it’s a good fit in your budget. And one way to do that is to put down a little more than you expected so your mortgage can be smaller and the payment can be more reasonable.”

Shop for low prices

If none of the above options are appealing or possible, try to find a better loan from your mortgage lender.

“I think it’s important to buy prizes as well,” Taylor says. “So work with a mortgage broker or just contact several lenders to understand what quotes would look like from a credit reporting standpoint.”

Please note that you should try to make all your requests within a 30-day period. “To get a real mortgage quote, most lenders will want to pull your credit – this is called a ‘hard inquiry,'” says Taylor. Hard inquiries affect your credit score, “but generally all hard inquiries are lumped within a 30-day window in certain feel together as an inquiry in terms of how much of an impact they have on your credit score.”

That said, “Some lenders will only quote you a loan amount without a credit check if you say you’re sure your credit score is X and you have excellent credit. That’s the best way to go,” if that’s an option .

You should also look into whether you can negotiate closing costs, which can be anywhere from 2 to 5 percent of your mortgage amount. You can see if the seller is willing to cover your closing costs entirely – a more likely possibility if we move to a buyer’s market. You may also be offered lower closing costs from an online lender, as digital-first companies can streamline their services and costs and pass the savings on to you.

Think holistically about your move

“Think about how different neighborhoods affect what’s going to happen to the rest of your budget,” says Taylor. For example, if you move to an area with good public schools and easy access to public transportation, you may be able to absorb a higher mortgage payment than intended because you now have extra money in other parts of your budget.

On the other hand, if your new home base requires you to buy a car (and then refuel that car) or extend your commute, you may want to save on your mortgage payments.

“Evaluate how being in a certain area affects your commuting costs and childcare costs: how all of these things will change based on the area that you choose to buy in can either help or hurt from a cash flow standpoint,” says Taylor.

Run the numbers on how higher interest rates affect your budget

“I think another thing to mention is that, with the change in interest rates, it’s important to do the numbers to see how much it actually changes things for you, because it often sounds scarier than it really is,” says Taylor .

“For example, if you borrow $500,000, interest rates from 5% to 6% will cost you about $300 more a month.” While not a trivial amount (especially over time), you may find rising interest rates more manageable if you adjust other parts of your budget. Also, if you can’t financially absorb a 1% or 2% change in interest rates, it could mean you’re too spread thin to buy the house you have in mind. (Not to mention having some money set aside for emergencies.)

And then there is the mental factor. Obviously, you might be kicking yourself if “buying a house” was on your to-do list a year or two ago, and you just didn’t take the time to look until now, when your dollar doesn’t go as far. At this point, though, you can’t turn back time – but you might find that the right house is still out there, within your budget.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less difficult if they fit your situation.

Haven Life is not authorized to provide tax, legal or investment advice. This material is not intended to provide and should not be used for tax, legal or investment advice. Individuals are encouraged to obtain advice from their own tax or legal advisor.

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