So you’ve heard interest rates are on the rise. But what does this really mean?
Essentially, it means you have less buying power when obtaining a mortgage. Your money simply doesn’t go as far as it did 1 year ago. You can’t leverage as much house on the mortgage as you could this time last year. Let’s break it down with some numbers…
Let’s say you set out to buy a $350k home in August 2021. Let’s assume you put 20% down and had standard tax rate of .93% (Source: SmartAsset) and homeowner’s insurance of $1,272 (Source: MarketWatch), at an average rate for that time of 2.84% (Source: FreddieMac), your total monthly payment would have been $1,534.
Now let’s say you set out to buy this same home today, except the average increase in values from 2021 to 2022 was 13.1% (Source: Redfin), so that home is now $395,900. At last month’s average interest rate of 5.41% (Source: FreddieMac), and the standard assumptions we used before, that total monthly mortgage payment is now $2,193.
Awful? Also no. Keep reading..
Let’s say you’re sitting in the “wait and see” boat – or on the sidelines to wait it out. Prices are expected to go up another 7.8% (Source: Zillow), so this same house will now be $426,349 next year. Let’s be optimistic and say rates come back down to 4.5% next year, your mortgage payment then is $2,164.
So, should you wait it out?
WE DON’T THINK SO!
Numbers don’t lie, and while we don’t have a crystal ball of exactly what is going to take place in the market, there is enough evidence to reasonably assume continued appreciation in property values year over year, and an increasing interest rate environment. While the rate at which homes appreciate is expected to decline, property values are projected to continue appreciating for the foreseeable future. If rates come down, refinancing may be an option to explore, but rates could continue to rise, too! Not to mention – you may be spending money on RENT during this waiting period too, which definitely isn’t building you wealth!
If you are financially and personally prepared to buy a home (think solid down payment, emergency fund, stable living arrangement, etc.), then now is your time to buy. You don’t have to – but it may cost you. Just ask those from 2018 or 2020 that said they were going to WAIT until home prices fell. They’re kicking themselves in the rear because we had record-setting appreciation year over year and their buying power significantly decreased.