Worried about rising mortgage interest rates? You’re not alone. The days of paying 3% for a 30-year fixed-rate mortgage are long gone. Today, you’re more likely to qualify for an interest rate near 4.8% when applying for a 30-year mortgage.
But real estate and mortgage professionals say that you shouldn’t let rising interest rates scare you away from buying a home.
Sure, rates are higher today than they were 2 years ago, but they’re still at historically low levels. It wasn’t too long ago that buyers considered an interest rate of 6% a good one for 30-year fixed-rate loans.
Today’s higher interest rates don’t negate the benefits of owning a home, most real estate professionals say. When you own a home, you gain tax advantages and you build equity.
And perhaps just as important: Real estate professionals say that interest rates probably won’t be dropping back down to that 3% level anytime soon. Buyers who are waiting for that to happen are probably wasting their time.
The message here? No one likes it when mortgage interest rates rise. But if you spend all your time obsessing over these rates, you’ll never get to enjoy the benefits of owning.
A Trend That Isn’t Reversing?
Adam Smith, president of the Colorado Real Estate Finance Group in Greenwood Village, Colorado, said that those buyers worried about interest rates might be hurting themselves by not acting more quickly to buy a home. The reason? Mortgage interest rates probably won’t fall in the near future.
“They, along with home prices, will continue to go up,” Smith says. “If you want to own a home, there’s no time like the present. Mortgages aren’t like wine and cheese. They don’t get better with age.”
Kyle Alfriend, managing partner of the Alfriend Real Estate Group of Dublin, Ohio-based RE/MAX Achievers, says that waiting might cost you even if rates do take a slight dip. That’s because the cost of homes continues to rise along with interest rates.
The National Association of REALTORS® notes that the median existing-home price across the country stood at $225,400 in October. That’s up 3.8% from October 2017 when that price was $246,000. The association says that the median home price has now increased on a year-over-year basis for 80 straight months.
Buyers might save some money if they do wait for a lower interest rate. But those savings might be erased because the price of the home they are targeting will probably have increased during this same waiting period, Alfriend explains.
Higher Rates Often Mean Lower Housing Prices
Luke Babich, CSO at Clever Real Estate in St. Louis, Missouri, says that home buyers need to remember, too, that even when mortgage rates rise, they don’t do so in a vacuum.
When rates rise, home prices tend to fall. Why? Because home buyers get nervous when they see rising interest rates and worry that they won’t be able to afford a home because of them, Babich explains. To keep the buyers coming, sellers then must lower their asking prices, he says.
“Give it a week or so after the rates go up; you’ll see sellers take action,” Babich notes. “There will always be people who need to sell. They will have to adjust their prices if buyers are hesitating because of interest rates.”
This means that a jump in interest rates doesn’t always equal a jump in unaffordability.
Rates Aren’t Permanent
It’s important to note, too, that the mortgage interest rate you sign on for when applying for a mortgage isn’t necessarily the rate you’ll have for the entirety of your loan. If interest rates fall significantly while you own your home, you can always apply to refinance your mortgage to a new loan with a lower mortgage interest rate. You will have to pay to refinance, but if your interest rate drop is large enough, you could save enough each month to quickly recover these costs.
“Rates can change while your purchase price is fixed,” Alfriend says. “Buying at higher rates today will get you the home at a lower price, allowing you to begin building equity immediately.”
The Benefits of Owning Are Still There, Even if Rates Are a Bit Higher
Russell Volk, a real estate agent with RE/MAX Elite in Huntingdon Valley, Pennsylvania, explains that buyers sometimes focus too much on the movement of interest rates and not enough on the benefits of owning a home.
When you own a home, you can claim yearly tax deductions for the interest you pay on your mortgage loan and the property taxes you pay. You’ll build equity as you pay down your mortgage, equity that you can tap in the form of home equity loans or home equity lines of credit. Then there is the intangible benefit of having a place of your own, not a place that your landlord owns.
Volk says that buyers should focus on finding a home in a community that fits their needs, like an area in a strong school district or maybe in an area that offers an easy commute to and from work.
“A solid real estate investment is much more important than trying to save a little on interest rates,” Volk suggests. “Real estate is a great investment, even if interest rates are on the rise.”
Renting? It’s not Always the Best Deal
Rising interest rates might steer you toward renting. But real estate professionals argue that when you rent, you’re basically throwing your money away.
Say you pay $2,000 a month in rent for your apartment. After 5 years, you will have paid your landlord $100,000 and received nothing in return.
But if you buy, and you take out a 30-year fixed-rate mortgage and make your payments for those 30 years, you’ll be rewarded with a home that you own. You’ll now only have to pay property taxes and homeowners insurance to live there.
The message here? Don’t try to time your home purchase to interest rates. Rates are constantly changing, so trying to buy at the perfect time could prevent you from ever making the move from renting to owning.
Instead, buy when you’re ready – when your credit score is strong, and you’ve built up the necessary savings. And the interest rates? You’d like them to be low, but even if they’ve risen a quarter of a point, that shouldn’t keep you from your goal of owning a home.
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