When you’re broke you pay more for the things you need — and a home is no exception.
Homebuyers with a credit score over 760 will pay $700 less a year toward the mortgage of the same home as those with a score under 680, says a study from real estate listing site Zillow.
“When you buy a home, your financial history determines your financial future,” says Zillow economist Aaron Terrazas. “Homebuyers with weaker credit end up paying substantially higher costs over the lifetime of a home loan. Of course, homeowners do have the option to refinance their loan if their credit improves, but as mortgage rates rise this may be a less attractive option.”
What it costs to buy a home
Homebuyers are able to purchase with a FICO score under 600. And historically it has made sense for those homeowners to refinance a few years later, if they’ve improved their credit, for lower interest rates which will lower their monthly payments. But as Terrazas points out: Rising mortgage rates may not make that the best option, considering the climate of the housing market.
Home costs have steadily been rising since last year. As Debt.com has previously reported, the costs of affording a home in 2018 are harder on homebuyers than they’ve been in 25 years. Housing affordability is down by 5 percent, and is predicted to sink by another 10-15 percent by the end of the year, says a study from Arch Mortgage Insurance Company.
“If mortgage rates and home prices continue to rise as expected, affordability will get hammered by year-end as demand continues to outstrip supply,” says Arch Mortgage economist Ralph G. DeFranco. “A strong U.S. economy combined with a housing shortage in many markets means that there is little hope of any price drop for buyers.”
It’s not just mortgage rates
For the past 10 years, homeowners insurance has been hiking upwards, says a study from online insurance market place QuoteWizard. And the reason why is the increase of natural disasters, and the damage they bring.
Last year brought a new record high of $300 billion for damage costs from natural disasters, says a study from the National Center for Environmental Information. That’s not the last of rising home costs, either. Homeowners are also faced with rising property taxes.
Property taxes on single-family homes have risen by 6 percent since 2016, according to data solutions company ATTOM. The U.S. paid a collective $293.4 million in property taxes last year, up from $277.7 million in 2016. The typical household paid $3,399 last year compared to $3,296 the year before.
If more natural disasters cause higher insurance costs, what’s driving mortgage rates to rise? While all these prices rise, the amount of homes for sale is going down.
Low housing inventory
With so many negatives in the market, buyers with lower credit may want to heed DeFranco’s warning that costs will only increase by the end of the year. Improving their credit will improve their interest rates in the future. As he points out, demand is moving quicker than the amount for sale right now.
Homes sold at a historically fast pace last year, says another study from Zillow. It took only 81 days to sell homes priced between the least and most expensive in the U.S. That’s nine days quicker than the year before, and a record, according to Zillow. And low inventory is motivating rising mortgage costs. But it’s not impossible for those who really need to buy a home this year, according to Terrazas.
“As demand has outpaced supply in the housing market over the past three years, buying a home has become an exercise in speed and agility,” Terrazas says. “This is shaping up to be another competitive home shopping season for buyers, who may have to linger on the market until they find the right home but then sprint across the finish line once they do.”
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