Perhaps you’ve been saving your money and watching the real estate market for some time and now, just when you’re ready to make your move to buy your first home you get broadsided by rising mortgage interest rates! Maybe you’ve been biding your time to sell your home and now the market has a chill that has you stalled wondering what to do.
For buyers, and sellers who become buyers, the higher rates will add to the cost of a monthly mortgage payment, but they don’t have to mean the end of getting into your dream. We have some advice to help you buy that house or condo, even at a higher interest rate. So, if you’re looking for a home because of divorce or loss of a spouse or maybe still looking for that dream home or first home, you are far from being shut out of this market as some would have you think!
I am constantly asked by buyers and sellers who want to sell and buy up or downsize if now is a good time to buy a home given mortgage rates moving above 7%, which is significantly higher than just a year ago. My response is to not fixate on the rate and while high rates can be discouraging for the short-term, there are some hidden benefits and strategic financial planning considerations that could make buying at today's rates pay off down the road. I prefer a more holistic approach to this decision that considers many factors.
1. Consider Total Monthly Housing Costs, Not Just The Interest Rate
Yes, the mortgage rates are moving higher, but with slower demand, purchase prices are stabilizing or even declining in some markets, though in the DFW metroplex they show a continued positive rate. Looking at the total monthly payment of principal, interest, taxes and insurance provides a clearer cost picture. Run the numbers - for some, ownership costs may be comparable to rising rents.
2. Weigh The Benefits Of A Fixed Payment
As an inflation hedge, a fixed-rate mortgage allows you to lock in a stable monthly housing payment (outside of taxes and insurance) for the long term. Contrast this to renting where payments will continue escalating higher. Yes, utilities should be a part of a housing budget, but you’ll pay these whether renting or owning so we’ve deliberately left that out but plan on them continuing to escalate as well.
3. Rates Are Likely To Decline In 1-3 years
As a financial planner, I tell clients interest rates are cyclical. What goes up, must eventually come down. Historically, periods of high rates are followed by declines. While timing is impossible to predict, it's reasonable to expect rates to decline at some point within a 1-3 year horizon. The National Association of Realtors® expects mortgage rates to rise to 7.8% by the end of December and then gradually decline to 6.3%. However, if you think ‘great, I’ll just wait for that’ then see reason #9!
4. Refinancing Could Recapture Savings
When rates decline in the future, prepaying a mortgage by refinancing at a lower rate can result in substantial savings. This repayment option does not exist when renting. Yes, you lose some savings from lower rates upfront by buying now, but refinancing allows you to recapture some of those lost savings when rates fall.
5. Weigh Tax Deductions
Accountants and Financial Advisors understand the benefits of the mortgage interest tax deduction. With today's higher rates, this deduction will be greater, providing bigger tax savings each year. For those itemizing deductions, this can help offset higher interest payments.
Depending on age and circumstances there are also property tax reductions that can make a big difference in the monthly housing payment. Special benefits to homeowners 65-years and older in the form of property tax reductions that ranges from having the school tax deferred to paying zero property tax for life depending on where you live. Check with your County Appraisal District (CAD) for details on these special property tax deductions.
6. Take Advantage of added negotiating power
Higher rates mean a larger portion of your payment goes to interest early on. Wise homeowners budget accordingly, with extra cushion for unexpected home expenses and repairs. Also set aside funds for closing costs that may be higher with today's rates. Contact your favorite Realtor who can help you with a rough estimate, ‘net sheet,’ for a given price and location.
7. Take advantage Of Added Negotiating Power. As a buyer, you are in a better position to negotiate a more favorable deal on price, repairs and inspections as well as ‘seller participation’ without pressure from multiple competing offers.
8. Explore Down Payment Assistance Programs
For certain first-time buyers there are programs like down payment grants, seller-paid closing costs and subsidized mortgages that can offset challenges of rising rates. These programs offer financial planning advantages.
9. Being Priced Out Of Future Appreciation
While the higher mortgage interest can reduce ‘buying power’ short-term, delaying could reduce ability to gain from future price appreciation when demand returns. Although purchasing power may not return to levels seen at lower rates this anticipated future pivot will benefit the homeowner and put the buyer at an increased disadvantage.
10. Homeownership Remains A Sound Investment
Even at today's rates, owning a home remains an effective way to build wealth. Equity accumulates through mortgage paydown and price appreciation over time. Real estate continues offering stability and strong returns. Renting builds wealth for the landlord – not for you!
In summary, today's high rates require careful financial planning consideration of both short and long-term trade-offs. While buying now may mean a higher rate, you lock in housing costs and can refinance when rates fall. Delaying may reduce buying power and increase the risk of being priced out of future appreciation. Give us a call – We have so many ways to help you sell for more and buy the house of your dreams you’re bound to like at least one.
If you are thinking of, or in the middle of a divorce, we want you to know you're not alone and we’re here to help. If you would like to discuss how we can assist you with your future plans, please give me a call at 469-556-1185.
Disclaimer: The information provided in this website and our blogs is not intended for legal, financial or mental health advice but is for general informational purposes only. While we endeavor to provide the latest information on a particular subject, future changes to the source Information are beyond our control.