Headlines about rising interest rates and red-hot bidding wars might make you hesitate to buy a home — but they shouldn’t. Now can still be a great time to buy a house, and you may end up regretting it if you decide to hold off.
What’s going on in the home market right now?
Two major trends are influencing the housing market right now: rapidly rising home prices and rapidly rising interest rates.
While home prices have risen steadily since the end of the Great Recession, they really took off in the middle of 2020. While the reasons for this are numerous and complicated, a lot of it can be attributed to the effects of the COVID-19 pandemic, including:
- Families spending more time at home
- An increase in remote work
- Low interest rates
At the same time, housing supply remained low due to:
- Supply chain and labor shortages causing a slowdown in new construction
- Homeowners who were reluctant to list their homes in an uncertain economy
- Homeowners who were unwilling to sell when they might not be able to find a new home to move into.
The result of all this? Rapid price appreciation.
At the same time, U.S. inflation is currently at its highest in four decades. In response, the Federal Reserve has begun to raise the key interest rates that affect interest rates for different kinds of loans, including mortgages.
Keep in mind:
Mortgage rates have jumped more than 3% since early 2020, now exceeding 6% for the first time since 2008.
The pace of home sales has begun to slow in many areas of the country as interest rates rise, but home prices have yet to follow suit. Some economists fear a recession on the horizon, which could cause home values to fall. But trying to time your home purchase exactly isn’t a very valuable strategy — it’s very difficult to predict the future.
If you’re thinking of buying a house, it’s a good idea to estimate how much your monthly mortgage payment might be. Plug your information into a calculator to see what you might pay each month if you decide to buy now at today’s prices and interest rates.
5 reasons why you shouldn’t wait to buy a house
With all the movement in the housing market, it can be hard to figure out whether now is the right time to buy — or if it would be better to wait. While your answer will depend on your circumstances, here are five reasons why it can still be a good time to buy a house.
1. Home values always rise in the long run
Home values in the United States have historically climbed over time, although they can periodically dip, as they did during the Great Recession. But in the long run, real estate in the United States has been an excellent investment. Even adjusted for inflation, home values today are multiple times higher than they were in the 1940s and 1950s. Home prices have increased in each decade since then, even in the 2000s with the dip during the recession.
2. Your investment value will grow faster
You can think of the money you spend on a down payment as an investment, just like a savings account. While it’s harder to access, the money is still yours — as equity in your home. And that down payment will likely grow in value much faster than money in a savings account.
For example, say you put $20,000 in a high-yield savings account instead of using it for a down payment. The best high-yield savings accounts are currently offering around 1% APY. At that rate, your savings grow glacially. In five years, you’d have just $21,025.41, if interest is compounded daily.
Home values are appreciating significantly faster, meaning you’ll earn more money by investing it in a home. Say you used that $20,000 to make a 5% down payment on a $400,000 home. At a relatively conservative 5% annual price appreciation rate, your home would be worth more than $510,500 after five years — netting you a profit of more than $110,000.
3. Your housing payment builds your net worth — not a landlord’s
Whether you buy a house or live in a rental, you’ll have a housing payment. You might as well use those payments to build your wealth, not someone else’s — like a landlord.
When you own your home, part of your monthly payments go to pay down the principal on your loan. This builds equity, the difference between what you owe on your mortgage and what your home is worth. You can access this wealth when you sell your home, or while you remain in your home through home equity loans or a cash-out refinance.
4. Home-related tax benefits can give you a break
Owning your home also comes with tax benefits that you won’t enjoy as a renter. One of the biggest benefits is the home mortgage interest deduction, which allows you to deduct all the money you pay toward your mortgage on your federal taxes, provided your loan is less than $750,000 and you choose to itemize your deductions.
This can add up to significant tax savings over time. With that $400,000 home, you’ll pay roughly $21,500 in interest in the first few years of owning the home at a 6.75% interest rate. You may be able to deduct that full amount from your federal taxes, reducing your taxable income and saving you potentially thousands of dollars.
Good to know:
If you itemize your deductions, you may also be able to take a deduction for any local, county, and state property taxes you pay. Plus, many states give income tax breaks for homeownership.
5. You can always refinance in the future
While mortgage rates seem high right now, they’re still very low by historical standards. For the last few years, the Federal Reserve held rates artificially low to bolster the economy during the pandemic. They’re coming up now as a way to tamp down inflation, which may or may not work.
But even around 6-7%, mortgage rates are still slightly below where they’ve been at any point before 2001. In the 1990s, rates ranged between 7% and 9%, and in the 2000s they typically fell between 5% and 7%.
Mortgage rates will continue to fluctuate over time, and you’re not locked into the rate on your mortgage forever. If rates go down, you may be able to refinance your mortgage to lower the interest rate you pay and reduce your monthly payment.
If you only plan to live in your home for a short time, between five and seven years, you may consider taking out an adjustable-rate mortgage to buy your home. These loans, commonly known as ARMs, generally have a lower interest rate than fixed-rate loans for an introductory period, often between three and seven years.
After that, your rate will reset every year (in most cases, but potentially more often than that) based on market conditions. At that point, you can consider refinancing to a fixed-rate loan if you haven’t sold your house already.
If you’re ready to start looking for a mortgage, Credible makes it easy to comparison shop. You can check mortgage rates from multiple lenders and get a streamlined pre-approval letter — without affecting your credit.
