It’s almost September. First, we need to remind you that the filing deadline for 2022 tax returns is nearing. October 16th will be here before you know it.
Both business and personal tax deadlines for California residents were extended to October 16th because of the heavy storms at the start of 2023, so we are expecting a HEAVY rush of tax preparation requests.
If you need help with 2022 tax returns, contact your Pronto Tax Office Location and/or Team Member ASAP to make sure we can get you helped before the October 16 deadline to avoid costly penalties and interest:
Many of us have gotten more comfortable at home in the last few years, due to the rise of the “work from home” trends.
But one thing that is making many people very uncomfortable is the price of housing these days.
Maybe you or someone you know have been dreaming of upsizing, relocating, or even buying your first home. While those are good dreams to have, timing is everything. And right now is a difficult time if you’re looking at new home ownership.
Inflation and the Federal Reserve’s 11 interest rate hikes since last year aren’t over — there’s a possible 12th rate hike on the horizon. This is a calculated move aimed at cooling down inflation. This is really causing a ripple effect in the housing market because mortgage rates are way up, which then increases monthly payment amounts for mortgages.
Whether you’re a first-time buyer or considering a move, let’s unpack how these economic moves may affect you or someone you know…
Navigating Mortgage Loan Rates Right Now
“The best time to buy a home is always five years ago.” – Ray Brown
If you’ve been keeping a watchful eye on the housing landscape because you’re in the market for a new home, you know that mortgage rates are at the highest they’ve been in 40 years.
And while age “ain’t nothing but a number,” interest rates are different. They have real impact on mortgage loans and could put a wrench in your home-buying efforts right now. So, navigating that means understanding the current landscape and figuring out what to do about it.
Here’s what things look like right now:
Qualifying for a home loan
Interest rates play a significant role in determining if, how, and when you can get a home loan. As rates go up, the monthly repayments on potential home loans follow suit. For you, this might shift the scales of what you can afford, forcing you to rethink the dream home you were eyeing last year if it’s out of your financial reach.
The domino effect on monthly payments
A higher interest rate translates directly into higher monthly mortgage payments. For every 1% increase in interest rates, monthly payments can increase by nearly 10% (depending on the loan’s specifics).
Let’s do some quick math. If you got a loan today for a $300,000 home at the current interest rate, you’d be paying around $500 per month more compared to 2020 rates, and all of that extra $500 is going to interest and not principal.
Now if you’re in California, you know it can be hard to find a home that costs anywhere near $300,000, so you can multiply those numbers accordingly…
This is why so many are watching what the Federal Reserve is going to do next with interest rates. Significant amounts of money are on the line with each increase (or decrease) in Fed rates.
The critical DTI ratio
When lenders assess your eligibility for a loan, one of their primary tools is the DTI (debt to income) ratio. This ratio measures how much of your monthly income is earmarked for debt repayments.
A surge in interest rates can mean that a previously healthy DTI is now less appealing, making lenders more hesitant.
If your DTI crosses a certain threshold (typically around 43% for a lot of lenders), you could encounter some closed doors in your search for a home loan.
Borrowing becomes costlier
In layman’s terms, as interest rates rise, the overall cost of borrowing goes up. This isn’t exclusive to mortgage loan rates; it’s a fundamental principle of finance. If you’re borrowing more due to a pricier property market, higher interest rates can add a hefty tag to the total amount you’ll end up repaying.
The strain on your financial profile
While we’d all love to sport a perfect credit score and a hefty savings account, reality is often more complicated. For those navigating financial constraints or a less-than-stellar credit score, rising interest rates compound challenges. It’s akin to climbing a hill that’s gradually getting steeper — still possible to navigate, but undoubtedly more demanding.
So, what do you do?
When you’re considering buying a home in this kind of environment, you have to be a bit more financially nimble and knowledgeable.
Though current mortgage loan rates are edging close to 7% (compared to around 4% in 2020), the forecast by most banks generally has 30-year loan rates decreasing to around 6% for the new year.
If time is on your side, it might be strategic to wait things out a bit.
Waiting will give you an opportunity to pursue some strategies to improve your chances. But some of these you can do to help your chances right now, too.
- Focus on debt. Working on reducing your existing liabilities can make your DTI more attractive, presenting you as a better prospect to lenders.
- Knowledge is power. Get pre-approved. This proactive step not only showcases your seriousness but also provides clarity on how much house you can realistically afford.
- Credit is key. If your credit can be improved, work on doing that. An enhanced credit score can open up opportunities for better rates, so it’s worthwhile to continuously improve here.
- Save up to put more down. A larger down payment can provide more favorable loan conditions.
Before settling, make sure you’ve explored a variety of loan offers to ensure you’re getting the most favorable terms. Maybe even consider Zillow’s 1% down payment?
Keep asking questions and be discerning in your home-buying decisions.
There is no place like home, sure, however we want to go into these kinds of decisions with information and wisdom at hand.
While the current landscape around mortgage interest rates might seem daunting, with informed strategies and the right preparation, it’s possible to position yourself favorably.
Looking out for you,
Pronto Income Tax Team