Spooked by Rising Mortgage Rates: 4 Essential Steps to Preserve Your Home Ownership Dreams

When interest rates are on the rise, it is easy for home buyers to get spooked. The home that once seemed so affordable at a 3% mortgage rate now seems out of reach when average mortgage rates are north of 5%, and that can send would-be buyers back to their rentals.

If you want to keep your dreams of home ownership and make them a reality, you can still do it, but it will take time, courage, and perseverance to make it happen. Here are four steps you can take to blunt the impact of rising mortgage rates and even turn them in your favor.

Step #1. Clean Up Your Credit

If you have not already started doing so, cleaning up your credit profile should be a top priority when mortgage rates are on the rise. The better your credit looks on paper, the easier it will be to qualify for the best mortgage rates, and that will become even more important in an environment of rising interest costs.

Cleaning up your credit may not be as difficult as you think. A number of studies have shown that a frightening number of credit reports contain errors that negatively impact credit scores, so check your profile carefully and report any discrepancies to the agency right away. Once any errors have been resolved, you can work on other ways to improve your standing with potential mortgage lenders.

Step #2. Prioritize Debt Repayment

When interest rates are on the rise, it is not just mortgages that are impacted. The credit card debt you are living with will also get a lot more expensive, and the increases in rates there could be even more than in the mortgage market.

If you want to preserve your dreams of home ownership and make them a reality, you need to prioritize paying down your other debt. Eliminating credit cards and other debt will accomplish a couple of important goals, and they will each feed into making your future home purchase more affordable.

First of all, paying down debt will improve your credit score, an important factor in determining your mortgage rate and qualifying you for a pre-approval. In addition, getting rid of that high-interest debt will free up extra cash, making it easier to save up for a higher down payment.

Step #3. Increase Your Down Payment

Now that you have paid down your debt and freed up some extra cash, it is time to put that money to work. Increasing your down payment is one of the very best things you can do in an environment filled with rising mortgage rates, and every dollar you spend up front is one less dollar you will have to pay interest on.

The higher the percentage of your down payment, the better, so make saving that extra money a priority. The fiscal discipline you exert now can pay off later, giving you the breathing room you need once your dreams of owning a home become a reality.

Step #4. Wait for Housing Prices to Fall

If there is a silver lining to the problem of rising mortgage rates, it is that home prices are likely to fall in such an environment. If the increase in mortgage rates is lengthy and sustained, these decreases in prices could become quite significant, and that could make buying a home more affordable instead of less.

This presupposes, of course, that you have taken a step-by-step approach to the problem of rising mortgage rates. By cleaning up your credit, paying down your debt, and saving up for a bigger down payment, you could become a much sought-after buyer in what was once a sellers’ market.

When mortgage rates are on the rise, it is easy to think your dream of home ownership has now become unobtainable. Increases in mortgage rates are enough to spook even the most intrepid home buyer, but the situation may not be as dire as you think. The four steps outlined above can help you survive and even thrive, in an increasing mortgage rate environment.