PenFed Mortgage with Confidence

Purchase, Homebuying 101, First Time Homebuyer, Finding a Home

Interest Rates Rising, Buy Now, or Wait?

What You'll Learn: With Rates Rising, Should You Continue to Rent or Buy Now?

EXPECTED READ TIME: 8 MINUTES

If you search for a property online, you will begin to see advertisements for mortgages telling you to "lock-in rates before they go up!" Homebuyers care about the rate they get, but your rate is not the only consideration when looking for a new home. We have put together this guide explaining several factors to consider when buying and why you should buy now rather than wait to purchase a property. 

Yes, Rates Are at Record Lows and Will Probably Not Stay There

Rates for mortgages in the past few years have fallen to record lows, and after bottoming out, they have begun to rise over the past three months. Recent announcements from the Federal Reserve have stated that they intend to make increases to their own record low interbank rates.

These Fed rates are essential for a potential home buyer because any increases in their interbank rate mean that mortgage rates will follow.

Economists expect that there will be three or four rate hikes over the coming year. In general, a rate hike is for 25 basis points or 0.25%, and if they make four of these over the year, it will mean that a year from now, mortgage rates will increase by a little over 1%.

A one percent increase does have a significant effect on a purchaser's buying power. It's estimated that a homebuyer, which relies on financing, has reduced purchasing power by 13% for every 100 basis point increase (1%) in the 30 yr mortgage rate.

Home Prices Are Rising and Are Expected to Continue Rising

There has been a hot housing market for the past few years, and prices have shot up in an amazing way. Because of the low rates seen in 2021, more people wanted to buy their first house. And with many working from home due to the Covid-19 pandemic closures, if they could afford to, renters chose to buy. That’s because they were spending much more time at home instead of work.

This increased demand reduced the supply of homes available for sale. Plus, with lowered supply and higher demand, as expected, home prices began swelling. According to the research firm Redfin, 2021 ended the year with the US median home price up 15.1%, hitting $382,840. Redfin also expects the prices for this year will continue climbing but are not likely to reach the rate seen in 2021. 

Continuing to Rent Is Not the Right Choice

Some may think that it is better to rent if prices have gone up. In the same research study, Redfin also found that the rent price over the same period has climbed 20.5%. This makes the average rental price approximately $440 greater than the average mortgage payment, assuming only 5% down.

The reason that rents climbed so high was the increase in housing prices. Many buyers were priced out of the market, which meant they were forced to rent. 

Most leases are for one year, and if choosing to rent longer than this, you will likely get hit with a rent increase. This year many renters were hit with substantial rent increases from Maine to California, causing some to move out of places they have lived for years but can no longer afford.

The other issue with renting is paying to make someone else wealthy. Every month your rent check goes to pay someone else's mortgage for the property you live in. This fact essentially means that the work you do ends up being for someone else.

When you own the home, you can think of a portion of your mortgage going toward buying a little piece of your house every month. The first month is the front door. The second is the door frame and doorbell, and with every additional month, you own more and more until you have paid off the mortgage and own it all. 

Choosing to Buy Is Almost Always Better

A real estate rule of thumb states that if you plan to stay anywhere for more than two years, it is almost always a better choice to buy than rent. The longer you plan to stay beyond the two years, the more beneficial it is to have purchased a home.

While this is almost always true, you need to look at your closing costs for both the purchase and sale, your monthly mortgage payments, HOA payments, and taxes.

Out of pocket, you could end up paying more over the two years, but you benefit from the increase in the home's value when you go to sell. Like our description of owning more of your home with each payment above, you gain the parts even faster with increased home values.

If the home price goes up by 5% (or 15% like it did last year), you get all of that gain but only owe the mortgage for the home.  As time goes by, the greater the benefit you gain from choosing to buy rather than rent.

Even With an Expected Climb, Rates Are Still Historically Low

Consider this – even if we see a quarter-point jump in rates every quarter this year, resulting in a 1% increase, the mortgage rate will still not be considered historically high. If we look at the past 50 years, rates have been as high as the high teens (there was an average mortgage rate of 16.84% in 1981!)

The Time is Now

With all of the factors leading to a continued increase in housing costs, now is the best time to find that dream home and purchase it before it moves out of your price range. Rates remain low, and the indicators tell us that the only direction they are headed is up.

Likewise, housing costs have increased over the past few years, but there is no indication that this is a bubble and that they will be headed south. All indicators say it makes sense to lock in a rate now and find a home you love before it moves out of reach. 

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