A friend called to ask how much mortgage rates affect the decision to buy a home. His son Joe wants to buy a house but he’s worried about the ups and downs of mortgage rates. Currently up, but not all that long ago way down.
Decisions like this don’t have one clear answer. Low rates might make you think the answer is an easy one. And high rates … well that can’t be a good time to buy. Or can it?
What buy-decision factors should Joe look at?
In Joe’s case, he and his wife are thinking of buying their first house. But the same thinking can apply to a co-op or condo. There are a couple of key factors that might make the obvious “buy now” choice a bit less obvious:
- First and foremost, whatever the current rate, you have to be able to truly afford home ownership and the cash flow involved, even if mortgage bankers tell you that you can handle it. As if lessons had not been learned, many mortgage lenders still offer very low down-payments and weakened qualifying criteria.
- Often low rates in many areas are counterbalanced by high home prices. And vice versa. When rates are higher (as they are now) often housing prices come down. And the extra you’re paying now may be made up by future capital gains when you sell, although nothing is for sure. So it’s not always a clear-cut financial decision.
Let’s look at Joe’s financial picture
Things are tight. He and his wife have tried to save, but something always seems to come up, and they only have about $18,000 in actual savings. They do also have about $25,000 in retirement accounts. Not a lot of cushion, but they are tired of “throwing money out the window” paying rent.
They found a house they like for about $235,000. And despite their so-so credit history, they qualify for a special program where they only have to put 3.5% down, plus closing costs and an extra annual fee. (These add up.) They also sees a 3% down mortgage they might qualify for, with extra cost factors there, too. (We don’t need to do the complete calculations here.)
So for less than $10,000 down, he can get a mortgage with payments a little over $1,000 a month, plus an extra $150 a month. Oh … and then there are the property taxes of about $300 a month, which we know usually go up. And the increase in electric, gas, water, etc. from the smaller place they live in now.
Hmmm … their rent isn’t looking so bad now. But rents also go up. And a house increases in value which is just like savings, isn’t it? Not always, as too many people can tell you. And there are additional costs for things like maintenance, repairs, unforeseen huge expenses, even more furniture than a smaller place.
So how should Joe look at his decision to buy?
He and his wife still feel like they want a solid home they can raise a family in. And the rates do give them pause. But they found a house that they love and whatever they decide is for their family’s future. Should rates stop them if they feel ready? Plus, they figure they can always use their retirement funds for an emergency.
Here’s my take on it. The years fly faster than you can imagine. And if you haven’t found ways to save yet, there is a good chance some habits that are getting in the way now won’t magically change when you buy the house — with even more things you can spend on.
Buying now could leave them in a financial position with no cushion to fall back on (they hardly have one now) in the event of a house, job, or health emergency. The urge to own may call, but starting off in a way that could soon see their credit cards filling up (and their retirement plans drained), isn’t creating a solid foundation for them or for their family’s future.
A few more thoughts
Owning your own home sounds like a wonderful thing — it is after all part of the great American dream. But some careful analysis and planning now can keep that dream from becoming a nightmare. If home ownership is what you really want, then it is also worth waiting for and working for.
Decide now to start saving more. You can even make it a game to find ways to save. Also clean up any credit issues, so they aren’t a millstone around your financial neck. The same new habits you’re creating now will help get you to a home you can own — and not one that will own you!
Oh … as for missing out on those oh-so tempting opportunities, though hard to imagine when the “perfect house” shows up, there will be more chances for that dream house. Planning now for a happier tomorrow can really pay off in the end.
P.S. For those who can afford it…
Of course, not all people are in Joe’s financial shoes. If you have the money and good financial habits and decide that home ownership is right for you at this time no matter how much the mortgage rate affects your payments, great.
Still, do your cash flow analysis (see below for help), make sure you leave yourself a readily-available emergency funds cushion, and count on lots of unexpected expenses and surprises.
Good luck whatever you decide!
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