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Should You Wait for Rates to Come Down Before You Buy

July 28, 2023

Buying When Rates are High

That is the million-dollar question, right? Some say wait, some say don’t wait, some say rent until the market crashes, and finally, some say buy now and refinance later. We know it can all be a bit confusing, so let’s look at this from a factual standpoint.

Renting = 100% Interest

When you rent, you get a $0 principal reduction, so literally every dollar spent goes to interest, and you only benefit the landlord. But others have told you that a 7% interest rate is too high, so buying a home right now is not ideal. We ask this: 7% is too high in relation to what? Let’s look at some facts.

Historical Mortgage Interest Rates

Historical mortgage interest rates have shown significant fluctuations over time. In the past, rates reached as high as 18% to 20% during the late 1970s and early 1980s due to soaring inflation. In the 1990s and early 2000s, rates ranged from 6% to 8%. However, after the 2008 financial crisis, rates plummeted to historically low levels, dropping below 4%. Past trends highlight that rates are not a fixed part of the landscape, have been much higher in the past, and will likely continue to fluctuate and drop again in the future.

Building Equity

A $250,000 home with an interest rate of 7% for 30 years has an interest principal and interest payment of $1,663.26. If you look at that same loan with an interest rate of 4%, that same principal and interest rate is $1,1193.54. Yes, that is a difference of $469.72, but we need to look at the entire picture.

If you were renting a $250,000 home in today’s market, you’d probably be paying about $2,000 a month, give or take. Over the course of a year, you would spend $24,000 in rent with $0 to show for it. If you owned that same $250,000 home, your mortgage payment would be approximately $2,200.00 per month (including your taxes and insurance), but you would also receive a $3,212.53 principal reduction which equals $267.71 per month.

Home Value Appreciation

The real reason not to wait is the cost of the home’s appreciation. Did you know the average home appreciation across the country last year was 8.41%? Let’s take that same $250,000 house—If you wait until next year to purchase this home, it will cost approximately $271,025. That is a difference of $21,025. So would you rather pay $469.72 monthly, which totals $5,636.64 over the course of the year using a 7% interest rate loan, or wait and pay an additional $21,025 for the same house one year later? Of course, it’s better to take the 7% loan now, knowing you can refinance later when interest rates come back down. Because yes, eventually, rates will go back down—We just don’t know exactly when that will happen.

Home Prices and Bidding Wars

Something else to consider is that when rates drop, there will be even more competition from the folks who decided to wait. This means that you will likely have to offer even more over ask to secure a winning bid. If you overpay for a house, you might be required to come up with more money out of pocket for a downpayment or have a higher monthly payment simply because of the added amount you are borrowing. You can never get the money back that you overpay on a house, but you can always refinance and lower your rate when they drop. Remember – marry the house, date the rate.

Seller Buydowns

There are some ways to secure a lower rate in this market using a seller buydown. This is where we ask for seller concessions to buy down the interest rate on the loan. We are then converting the concessions into discount points. If you are a buyer, this could help lower your payment and possibly help you qualify for a loan for which you may have previously been denied.

While the cost of higher mortgage interest rates might seem daunting, it’s important to remember a few things when considering your options to buy. The cost of renting is always at a rate of 100% – the payments you make every month do not earn you equity in a home. Your payments help someone else’s investment. Home prices are not going to drop in the foreseeable future, so today is the lowest price that house you’re looking at is ever going to be. Finally, renting may seem cheaper and easier in the short term, but purchasing a home is going to be one of the best investments you will make in your life.

Reach out to a Homestead Financial Mortgage loan advisor for details. We would love to help make your dream of homeownership a reality.

If you’re curious about your numbers, try our helpful rent vs. buy calculator.

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