With the general sharp rise in interest rates lately, mortgage rates have followed suit. Compared to the low rates we’ve enjoyed the last few years, 5%+ mortgage rates look high. But historically, they’re still lower than normal. If you’re only now ready to buy, or you’d like to move, it is definitely more expensive to do so than just a few months ago, which is unfortunate. Yet interest rate movements matter much less than you think. If you want to buy a house, and you’re ready financially, buy a house.
Mortgage Rates Today
Mortgage rates have suffered an unusual spike so far this year, rising from around 3% to 5% since the beginning of 2022. For a $400K conventional loan, that equates to about a $460 increase in the monthly payment. Still, home price appreciation over the past year of around 20% has contributed almost as much to the higher mortgage payment for new home buyers.1 Home appreciation is usually a worse effect because it also increases the down payment you need to come up with (see the tables below). Mortgage rates can always go down in the future and you usually can refinance your loan. The purchase price and the down payment you fork over is locked up until you sell or pull money out.
Mortgage Rates Strategies for Homebuyers
Over most normal short-term periods, mortgage rates move around less and typically have a muted impact on affordability during your shopping window. Waiting for lower interest rates may work or may not. Even if rates fall, home prices could continue to rise. Professional investors can’t even predict interest rates or home prices. If you want to buy a house, buy a house.
Always remember that as a homebuyer, you have an asymmetric advantage when it comes to borrowing. If rates continue rising, your timing was great. If rates fall after you borrow, don’t fret. You can always refinance to a lower rate down the road (assuming, of course, that your credit standing hasn’t changed and you don’t have an onerous waiting period or prepayment penalty). So for a conventional loan, you have limited downside and unlimited upside in terms of interest rates.
The best way to look at your fixed-rate mortgage, at any given point in time no matter the rate, is as an effective long-term inflation hedge from today because you’re capping your long-term housing expense. And your housing costs could go down if you refinance lower later. Renters on the other hand are exposed to inflation and the greed of landlords. Rents have a floor, not a ceiling. When was the last time your landlord cut your rent?
You can’t control or predict interest rates, so make your choice based on affordability. Deciding whether to buy or hold off to continue saving is within your control.
What Home You Can Afford Is What Really Matters
In the financial planning profession, we have a couple of ratios—also used by lenders to assess creditworthiness—that can help you assess your financial wherewithal to buy a home:
Your Homeownership Costs Should Be ≤ 28% of Your Gross Income
Your Homeownership Costs PLUS Other Debt Payments Should Be <= 36% of Your Gross Income
Homeownership costs in this instance include your mortgage payment, property tax, home insurance, and any mortgage insurance.
As a financial planner, I help folks assess their ability to buy and also help them compare buying versus continuing to rent, which is not the same thing as simply comparing a mortgage payment to your current rent.
If you were on the borderline of these prudent ratios then, yes, the rise in mortgage rates may have pushed you over the edge. But if you could have solidly met these guidelines before, the rise in rates doesn’t matter much to you. The advantage of buying is probably still overwhelming (for the purchase of a long-term personal residence, that is).
Mistakes to Avoid When Home Shopping
- Don’t obsess over or try to predict interest rates.
- Never forget your optionality as a borrower in terms of interest rates (you can stay in the home if rates rise, or refinance/move if rates fall).
- Don’t stray from focusing on affordability.
- Don’t fail to shop around for a mortgage.
- Don’t be afraid to consider lenders outside traditional banks, such as Internet mortgage providers (but do your homework).
- Don’t shy away from playing offers against each other to negotiate a lower rate or better terms.
- Don’t underestimate the value of flexibility because you may change your mind in the future.
- Once you make your decision, don’t forget to pay for a rate lock that will cover a reasonable expectation of the time to close.
- Oh, and don’t neglect to check the lender’s math. I’ve personally seen the closing math be wrong multiple times.
If you can afford a mortgage at anywhere near the current rate, focus on finding the house you want and can afford, not interest rates. There’s really no need to wait because, again, daily fluctuations will rarely make a difference in the end. And as mentioned, you can always refinance if rates drop considerably in the years to come (with caveats).
Your mortgage agent/broker might call or email you during the buying/application process to pressure you about locking in ASAP. They want their commission and the sooner the better. Curiously, they always happen to think rates have bottomed for the moment and you’ve got to hurry to take advantage. Ignore them and take your own time to make the right decisions for you.
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.