It’s no secret that real estate prices have skyrocketed in the last three years, partly due to COVID-19 and the increase in work-from-home arrangements. However, the Federal Reserve has considerably raised its target interest rate since the beginning of 2022, affecting most economic rates – including mortgage rates.
Mortgage rates considerably impact the monthly payment, so the higher the rate, the less affordable homes become. Because of this, potential buyers may wait until rates come down before purchasing a new home. That could make a mortgage payment smaller, but there are also downsides.
If you are thinking about buying a home, should you buy now or wait for lower rates?
Understanding Mortgage Rates
Mortgage rates are the interest you pay on the money you borrow to buy a home. The most significant factor in determining your mortgage rate is the current interest rate environment when you take out the loan. Still, personal factors like your credit score, income, and the length of your mortgage play a big part, too. Generally, the riskier it is for the bank to lend you money, the higher your rate will be.
They have fluctuated quite a bit over the years. They were above 7%, often considerably, from the 1970s through the 90s. They started to fall gradually in 2000, reaching about 3% in 2020, but are now near 7%.
Numbers and percentages are hard to imagine unless put into perspective, so let’s examine them further. On a $500,000 mortgage, a 1% drop would reduce your payment by nearly 10%, or $330 per month ($60,000 over the life of the loan).
We’ve been spoiled in recent years because interest rates have been so low, but now, with the average near 7%, we’ve had a rude awakening.
Pros of Buying a Home When Mortgage Rates are High
There are good reasons to buy now rather than wait for rates to drop.
If your goal is to build equity, the sooner you begin, the quicker that will happen. There’s also the chance that rates will increase, so you don’t know how long you might wait. Locking in a fixed-rate mortgage now protects you from that risk. The interest on your primary home is also potentially deductible on your tax return.
Cons of Buying a Home When Mortgage Rates are High
Of course, buying a home when rates are high means your monthly payments will be higher. Since you are limited to what you can afford, that higher payment effectively means you may have to buy a lower-priced home.
There is also a chance that your property value may fall, but you’d be stuck with that high payment. If you’re looking to invest in real estate, a higher mortgage rate means you may not be able to find as many viable investment properties.
Assessing Your Financial Situation
Before making a decision, assess your budget and make sure it’s affordable. Also, consider how buying a home fits your long-term plan and impacts your other goals.
Lastly, you don’t want to be stuck with a mortgage you can’t pay. Consider how stable your job is. If layoffs are likely or you aren’t sure of your prospects, you might want to hold off.
Strategies for Navigating High Mortgage Rates
If you decide to buy, shop around for the best mortgage deals. If you can’t find a reasonable rate, you may consider alternatives like seller financing or asset-based lending.
There’s also a type of buying strategy called an assumable mortgage where you can take over the seller’s mortgage rate (which might be lower than the one currently offered).
Don’t leave money on the table without negotiating with the seller. You won’t get what you don’t ask for.
Factors to Consider in Your Decision
Think about the local real estate market. Are prices stable? Do most homebuyers work for one or two major employers, or are there more diverse employment opportunities?
How does buying a home fit into your plans? Buying may not make sense if you plan to be there for just a few years since building enough equity generally takes 5 to 7 years to make up for closing costs and interest payments.
Don’t forget about your risk tolerance. Buying a home is a big commitment, so wait until you are comfortable taking that risk.
In addition, you also need to remember to factor taxes, insurance, and maintenance for your home into the equation when determining your budget.
You can also get creative in your home buying process! Perhaps you purchase a duplex instead of a single family home and rent out the other unit. Or, you could buy a house with an accessory dwelling unit (like a loft living space in an attic or garage) and use it as a rental location to help offset your mortgage costs.
Unfortunately, it’s impossible to predict where rates will go from here. It could be decades before they fall, and they may even continue to climb. Assess your situation, consider your budget, and consider how buying a home fits your overall plan. Above all, buy when the time is right for you.
Federal interest rates were recently lowered by 0.5% for the first time in 4 years. However, rates are still high compared to the last decade.