Dear Olivia,
It’s been a dream to own my own home, but just when I’m getting close to being ready to buy one, interest rates are going up. How worried should I be?
Sincerely,
Not Interested in Paying More Interest
First of all, kudos to you for working hard to buy a home! There is so much satisfaction to gain from making so much progress toward a goal.
But I understand that being so close to achieving that goal and facing increasing interest rates is a major letdown. It’s not all bad news, though!
Yes, Interest Rates are Going Up, But You Still Have Time
As I’m writing this, interest rates on a 30-year conventional mortgage are about 4.92%. While that’s well above what it was in March 2021 (3.575%), it’s still a lot lower than it was in the not-too-distant past.
For example, according to Freddie Mac, 30-year mortgage rates averaged 4.14% in April 2019. In October 2018, it was 4.83%. Going a little further back, interest rates in 2014 averaged 4.17% for the year. In the early 2000s, rates were in the high fives to high sixes. In fact, in 2000, the average mortgage rate was 8.05%.
The moral of the story is that while 4.92% is a much higher rate than the 3.575% we enjoyed a year ago, it isn’t a terribly high interest rate. While your purchasing power is now a little lower, it isn’t lower by a huge margin.
So, if you feel panicked and as though you need to buy a home right this instant, take a breath. You have time. Yes, interest rates might be higher in two or three months. But it isn’t worth rushing into a big financial decision right now to lock in a slightly lower rate.
Some experts believe that we’ll end 2022 with mortgage interest rates in the neighborhood of 4.5%. That estimate might be a little low, but even if rates end up at 5% in December, it isn’t that far off from where we are right now.
Interest Rates Will Ebb and Flow
The general trend for interest rates this year is expected to be upward. But that doesn’t mean that there won’t be periods in which rates fall.
If you work closely with your lender and Realtor to monitor what interest rates are doing, you might be able to time your home search and make an offer during one of the periods in which rates go down.
For example, average rates for March 2021 were 3.08%. But that dropped to 2.84% by August 2021. By December of last year, rates had risen back up to 3.10%.
While I doubt that rates will be that low at any point in 2022, there might be opportunities to lock in a rate closer to 4% than 5%. Just keep your finger on the pulse of what rates are doing, and you might be able to save yourself a little money by getting financing during a period of falling rates.
Sticking to Your Budget is More Important Than Ever
Real estate is all about location, location, location, but if you can’t afford to pay your mortgage payment, the location of your home doesn’t much matter!
With home prices up and interest rates going up, you might feel like you need to bust your budget to get the right home for you. This can be a mistake, though. Being house-poor is no fun!
Instead, stick to your guns with your budget. In fact, it might be wise to lower your budget and target homes that are a few thousand dollars below what you can afford.
Speaking of what you can afford, don’t wing it. Have a frank conversation with your lender to determine what you can and cannot afford. They should be able to give you a broad estimate of what you can afford based on the interest rate. So, if you want to know your buying power if interest rates jump to 5% or 5.5%, your lender can tell you.
Getting more information now to help your decision-making in the future will greatly benefit you. I know it can be stressful watching interest rates rising, but try not to panic. There’s a home out there for you!
~Olivia
If you have questions about buying a home in this crazy market, don’t hesitate to reach out to me at 307-856-3999!