Is Now a Good Time to Purchase a Home?
Looking for a specific neighborhood or amenities? Accepting a new job in a different city? Purchasing a home is one of the biggest expenditures the average household may make. Whether you have a growing family or are a downsizing empty-nester, the decision to purchase a new home takes careful consideration.
The Current Interest Rate Environment
In March 2022, the Federal Reserve began raising interest rates in an unprecedented effort to combat inflation. Before that, the United States had experienced nearly zero rates for the bulk of the prior 13 years. The recent rise in mortgage rates has many wondering if they should purchase a home now or wait until rates decline.
How Do Interest Rates Affect My Home Buying Decision?
Cost of a Mortgage Loan: If the bank is charging you a higher interest rate for your mortgage loan, your monthly payment will be higher. Assume you are financing $250,000 at a fixed rate for 30 years. If the interest rate is 3%, your monthly payment would be $1,054. However, if your rate is 7.5%, your monthly payment would be $1,748. Clearly, lower rates of recent years were much more favorable for potential home buyers than current rates.
Qualifying for a Loan: Some households may have a difficult time qualifying for a loan if the lender feels the payment amount is not in line with their income. A general rule of thumb is that the principal, interest, taxes, and insurance should not total more than 28% of your gross income.
Diminished Expectations: If you have a limit on the monthly payment you can afford, you may not be able to afford the house you desire. Review your list of needs and wants when deciding if you can live with the alternatives.
Refinance Later: If you’re set on purchasing a home now, you could choose to obtain a mortgage loan at the current rate and then plan to refinance once rates head lower. An important note to keep in mind is that refinancing also has costs such as application fees, title searches, and appraisals and there is no certainty when rates may become more favorable if at all. In addition, home prices may be under pressure at the same time that rates move lower. This will lead to an unpleasant situation in which your home no longer appraises high enough to cover the loan you already have, leaving you stuck in the higher rate mortgage!
Homes in Short Supply: The inventory of homes in your desired location may be in short supply as current homeowners are reluctant to give up their historically low mortgage rate and put their homes on the market. You may also find offers close to, or above, the asking price. Homes may be under contract within days of listing and all cash offers may win the bidding war over those with a conventional loan.
Cost of a Fixer Upper: If you are willing to settle for a lower priced home that needs some TLC, you may find that the cost for materials and contractors have risen as well. You could quickly sink more funds into the project than you intended, or experience delays during renovation as skilled labor and materials may be stretched thin.
Let PFM be your Trusted Partner
When you are a PFM client, we’re just a phone call away to help you make sound financial decisions. We can calculate your income and expenses and make changes to your plan when life takes you in a different direction. Contact us to schedule a free consultation to learn more about our services.