Today, we bring you a guest post from Barbara Friedberg, one of our 15 partners in the Down Payment Movement. Barbara holds an MBA and is a former portfolio manager, university finance instructor and long time real estate investor. You can learn how to invest and build wealth at her two websites, Robo-Advisor Pros and Barbara Friedberg Personal Finance.
For the last few years, interest rates have been rock bottom to boost economic growth after the 2008-2009 recession. Finally, the economy is humming along. So, the Federal Reserve Bank is raising interest rates back to normal levels. That means mortgage rates are going up.
So, if you have been planning to buy a home, you might want to take action now. Here’s why.
Increasing Mortgage Rates May Make Home Buying More Expensive
The rising federal funds rate could hurt if you’re in the market for a new home. According to the New York Times, mortgage rates are influenced by inflation rates and interest rates. Currently, interest rates are trending up.
Freddie Mac, the government sponsored enterprise that backs housing loans across the country, expects the average 30-year fixed mortgage rate to average 4.6% in 2018. It’s possible that mortgage rates could continue to go up and remain higher.
If you are borrowing hundreds of thousands of dollars with a fixed rate 30-year mortgage, a rate hike of 0.5% to 1.0% could increase your interest payment by more than a hundred of dollars per month.
Home Buying Decision Time – Pros and Cons
If you’re still on the fence about making the plunge, consider the pros and cons of buying a home. There are both practical and the emotional reasons to buy a home.
Home Buying Advantages
On the pros side, owning your own home gives you a chance at growing your wealth and building equity. As you pay off your mortgage you get closer to owning your home outright. Nationally, the average home appreciation rate between 2000 and 2018 is 2.4%. That number varies depending upon where you live. Although not outstanding, it usually beats renting as there is zero appreciation for your rent payments.
Also, when you buy a home you enjoy tax advantages as well.
If you buy your home with a fixed rate mortgage, then you know that your mortgage payments are stable for the duration of the loan. That is a huge comfort in light of rising rent payments.
Apart from the financial benefits, buying your own home provides psychological returns. You have control over where you live. You can create the nest that you desire. Paint the walls, landscape how you please and enjoy the knowledge that your residence belongs to you.
Home Buying Disadvantages
If you move frequently, you probably don’t want to buy a home. There are high transaction costs when buying a home including realtor commissions, which can amount to thousands or even tens of thousands of dollars. Home appreciation is not guaranteed, especially during short time periods.
We bought a home in Indianapolis and anticipated staying in that home for a long time. When circumstances changed, and we needed to move two years later, when we sold, we took a financial hit. Unless you expect to stay in one place for five to seven years, it’s typically better to rent.
If your income is variable and your financial situation tenuous, you might be better off waiting to buy. Should you experience an income decline, you can move to a more affordable apartment. But, if you can’t make your home payments, you’ll face marks on your credit and possible foreclosure.
If buying a home now isn’t in the cards now, you can still invest in real estate for small sums of money.
Should I Buy a Home Now Wrap Up
If you have been planning to enter the home-buying market then it might be better to buy sooner rather than later, as mortgage rates may continue to rise. But, before making the decision, be sure that you’ll be able to stay in the home for a while and can afford not only the principal and interest payments, but also the taxes, repairs and maintenance.
Finally, don’t automatically assume the mortgage lender knows best how much home you can afford. Make that decision yourself. Financially, it’s better to buy a home you can afford easily than stretching to make a higher mortgage payment.