Over the last month, mortgage interest rates have risen half of a percentage point for most lenders. Forecasters expect the trend to continue. It is highly possible that the record rates seen this spring (below 3.5% for 30 year fixed rate mortgages) are gone for good. This has obviously impacted the affordability of home ownership for many prospective buyers, and made it harder for sellers to stretch their asking prices. A 0.5% bump in rate increases one’s monthly payment by $28 per $100,000. While rising interest rates will play a large role in one’s determination of how much house they can afford, it should not markedly alter the basic decision to buy rather than rent.
Alternating trends in housing
After the housing bubble burst in 2008, nobody wanted to buy a house for a long time. Even after the market bottomed, investors (those buying houses with the intention of renting them out) were the first ones back in the market. They continue to play a large role. More people were choosing or being forced to rent, leading to a nationwide increase in rental rates.
As the housing market has stabilized and interest rates plunged, the calculation of the monthly cost of buying vs renting suddenly looked very attractive. One study by Trulia Trends estimated that the national average of 30 year fixed interest rates would have to increase to 10.5% before it would stop making sense to buy a home. While not unprecedented, such rates in the current economic environment would have far reaching consequences impossible to predict. Suffice it to say, buyers should not be swayed from their decision by today’s rising rates.
What you need to remember
If you are in the market to buy, you do need to be careful not to get sucked into buying a more expensive house than you can realistically afford. If you were looking at homes priced at $350,000 when rates were at 3.5%, you may want to look at houses for $325,000 now that they are at 4.0%.
Furthermore, most markets across the country have more buyers than inventory right now. Frequently you will have to offer more than the asking price to get the house you want. If you fall in love with a house at the top of your affordability range, then are forced to bid high, you may get a further surprise with rising rates. Ultimately you may end up with a monthly payment significantly higher than you can afford.
While buying itself may be the right financial decision, you might be wise to rent for another six or 12 months to increase your savings, enabling you to make a larger down payment. And do not forget all the other expenses that go into home ownership: not only taxes, insurance and homeowner’s dues, but maintenance, utilities, perhaps yard care, a new roof or water heater a few years down the road, and the many small expenses you could not have possibly anticipated.
Once in contract for a house, tell your lender you want to lock the rate right away. All lenders have the ability to lock the rate at least 60 days prior to closing, some even longer. It can seem tempting to wait in hopes that rates will go back down, but you have much more to lose by waiting. In this market, rates seem likely to continue their upward trend. Don’t get caught in the market and end up with your dream home, but no residual income to enjoy it!
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