Dawn Allcot
Mortgage rates hit 7% and beyond toward the end of 2022, rising from less than 3% in 2021, according to The Washington Post. But does that mean it’s a bad time to buy a house? Not necessarily.
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Securing a mortgage now could mean you’ll get (comparatively) less house for your money. But that doesn’t mean you should wait out the market for interest rates to fall. First of all, it’s worth considering that a home is more than just a financial investment; it is a place to live, set down roots, and make memories with your family — and you have to live somewhere. As long as you consider your budget carefully and can afford the home you want, it doesn’t make sense to wait to buy if you are ready to make a move.
Keep in mind, there are some drawbacks to buying when rates are high — drawbacks that could make the buying process more frustrating than usual. It may be harder to get approved for the home you want when interest rates are high. Lenders consider your overall monthly payments compared to your income, overall debt, and other financial obligations. Buying when interest rates are high could mean sacrificing on some levels, such as buying a smaller or more outdated home.
On the other hand, there may be less competition amongst buyers, and sellers may be more willing to reduce prices. That invites a discussion surrounding some of the real financial benefits to buying a home in a high-interest rate environment.
Housing Prices May Be Lower
While experts aren’t predicting a housing market crash, home prices dropped by 2.4% between June 2022 and November 2022, GOBankingRates reported. Experts predict a drop of 10% to 15% before the end of year, which would be the largest housing price correction since World War II. This market softening, or correction, is making homes more affordable for many people, especially if you have a large down payment to help offset higher interest rates.
Fewer Buyers in the Real Estate Market
It’s harder to qualify for a loan when interest rates are high, which means there will be fewer buyers competing for existing home inventory. Homes are staying on the market longer, which means you may be able to take more time to consider your choices and make a decision.
Less Risk During the Buying Process
Not only is it harder to qualify for a mortgage, which means you are less likely to buy more home than you can afford, but you’ll also face fewer risks throughout the bidding process. In a seller’s market, buyers often feel forced to waive contingencies to compete for the home they want. That could mean that you agree to forego a home inspection, putting you at risk for pricey repairs after you move in.
Homes Less Likely to Sell for More Than Their Appraised Value
Similarly, in a seller’s market many buyers are willing to pay more than the appraised value for the home of their dreams. That puts buyers without extra cash at a disadvantage, since you typically can’t secure a mortgage with a loan-to-value ratio under 20%. If you agree to pay more than the home’s appraised value, you’ll need to pay the difference in cash.
You Can Buy Down Your Interest Rates
Once you find a home you can afford, you have options to secure a lower interest rate. You may be able to purchase “points” on your mortgage, which reduces your interest rate. Typically, for every 1% of your mortgage loan amount you pay at closing as “discount points,” your interest rate will drop by .25%.
You Can Refinance at a Later Time
The future holds no guarantees, of course, but if you plan to stay in your new home for a while, you may consider refinancing if mortgage rates drop. You’ll have received the benefit of buying a home at today’s lower prices, and then reduce your mortgage payments by refinancing at tomorrow’s (hopefully) lower rates.
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Of course, you want to make your mortgage payments on time and preserve your good credit to take advantage of a re-fi if rates drop. And remember, rates may not drop right away, if at all, so make sure you can afford the home you’re buying at today’s rates.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Is There a Benefit To Buying a House When Interest Rates Are High?
As an expert in real estate and mortgage markets, I can provide valuable insights into the article discussing the impact of high-interest rates on the housing market, particularly focusing on the benefits and drawbacks of buying a house during such times.
Firstly, the article correctly points out that mortgage rates rose significantly, reaching 7% and beyond by the end of 2022, a notable increase from less than 3% in the previous year. This information aligns with broader economic trends and is consistent with data reported by reliable sources such as The Washington Post.
The article suggests that despite the higher interest rates, it may not necessarily be a bad time to buy a house. This perspective is well-founded, considering that a home is more than just a financial investment; it serves as a place to live, establish roots, and create lasting memories with family. The advice to carefully consider one's budget and move forward if financially feasible is sound and indicative of a comprehensive understanding of the housing market dynamics.
The drawbacks mentioned in the article highlight the challenges of buying in a high-interest rate environment. It correctly points out that securing approval for a desired home might be more difficult, and potential buyers may need to compromise on certain aspects, such as purchasing a smaller or older home.
The article then delves into several key concepts related to the real estate market:
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Housing Prices May Be Lower: The article presents evidence that home prices dropped by 2.4% between June 2022 and November 2022, with experts predicting a further drop of 10% to 15% by the end of the year. This information is crucial for potential homebuyers, as lower housing prices can make homes more affordable, especially for those with substantial down payments.
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Fewer Buyers in the Real Estate Market: The article rightly emphasizes that higher interest rates make it harder for buyers to qualify for loans, resulting in fewer buyers in the market. This reduced competition can offer advantages to potential buyers, allowing them more time to evaluate options and make informed decisions.
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Less Risk During the Buying Process: The article discusses how the difficulty in qualifying for a mortgage in a high-interest rate environment can lead to fewer risks for buyers during the bidding process. This is a key insight, as buyers are less likely to waive contingencies and face potential risks associated with a hurried decision-making process.
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Homes Less Likely to Sell for More Than Their Appraised Value: In a seller's market, buyers often pay more than the appraised value. The article suggests that in a high-interest rate environment, this scenario is less likely, which benefits buyers who may otherwise struggle to secure a mortgage with a lower loan-to-value ratio.
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Buying Down Interest Rates and Refinancing: The article provides valuable advice on options available to buyers in a high-interest rate environment. It mentions the possibility of purchasing "points" on a mortgage to reduce interest rates and highlights the option to refinance at a later time if rates decrease. These strategies showcase a deep understanding of the financial tools available to homebuyers.
In conclusion, the article effectively explores the nuances of buying a house when interest rates are high, considering both the challenges and potential benefits. The information presented demonstrates a well-rounded expertise in real estate and mortgage markets.
