Mortgage rates hit 7% and beyond toward the end of 2022, rising from less than 3% in 2021, according to The Washington Post. But does that mean it’s a bad time to buy a house? Not necessarily.
Securing a mortgage now could mean you’ll get (comparatively) less house for your money. But that doesn’t mean you should wait out the market for interest rates to fall. First of all, it’s worth considering that a home is more than just a financial investment; it is a place to live, set down roots, and make memories with your family — and you have to live somewhere. As long as you consider your budget carefully and can afford the home you want, it doesn’t make sense to wait to buy if you are ready to make a move.
Keep in mind, there are some drawbacks to buying when rates are high — drawbacks that could make the buying process more frustrating than usual. It may be harder to get approved for the home you want when interest rates are high. Lenders consider your overall monthly payments compared to your income, overall debt, and other financial obligations. Buying when interest rates are high could mean sacrificing on some levels, such as buying a smaller or more outdated home.
On the other hand, there may be less competition amongst buyers, and sellers may be more willing to reduce prices. That invites a discussion surrounding some of the real financial benefits to buying a home in a high-interest rate environment.
Housing Prices May Be Lower
While experts aren’t predicting a housing market crash, home prices dropped by 2.4% between June 2022 and November 2022, GOBankingRates reported. Experts predict a drop of 10% to 15% before the end of year, which would be the largest housing price correction since World War II. This market softening, or correction, is making homes more affordable for many people, especially if you have a large down payment to help offset higher interest rates.
Fewer Buyers in the Real Estate Market
It’s harder to qualify for a loan when interest rates are high, which means there will be fewer buyers competing for existing home inventory. Homes are staying on the market longer, which means you may be able to take more time to consider your choices and make a decision.
Less Risk During the Buying Process
Not only is it harder to qualify for a mortgage, which means you are less likely to buy more home than you can afford, but you’ll also face fewer risks throughout the bidding process. In a seller’s market, buyers often feel forced to waive contingencies to compete for the home they want. That could mean that you agree to forego a home inspection, putting you at risk for pricey repairs after you move in.
Homes Less Likely to Sell for More Than Their Appraised Value
Similarly, in a seller’s market many buyers are willing to pay more than the appraised value for the home of their dreams. That puts buyers without extra cash at a disadvantage, since you typically can’t secure a mortgage with a loan-to-value ratio under 20%. If you agree to pay more than the home’s appraised value, you’ll need to pay the difference in cash.
You Can Buy Down Your Interest Rates
Once you find a home you can afford, you have options to secure a lower interest rate. You may be able to purchase “points” on your mortgage, which reduces your interest rate. Typically, for every 1% of your mortgage loan amount you pay at closing as “discount points,” your interest rate will drop by .25%.
You Can Refinance at a Later Time
The future holds no guarantees, of course, but if you plan to stay in your new home for a while, you may consider refinancing if mortgage rates drop. You’ll have received the benefit of buying a home at today’s lower prices, and then reduce your mortgage payments by refinancing at tomorrow’s (hopefully) lower rates.
Of course, you want to make your mortgage payments on time and preserve your good credit to take advantage of a re-fi if rates drop. And remember, rates may not drop right away, if at all, so make sure you can afford the home you’re buying at today’s rates.
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